Paying Taxes with a Credit Card. Is it Right for You?
, by Rob Kaufman
Tax time can be a stressful period. It can be even more stressful when you don't have the money on hand to pay the taxes you owe. What are you supposed to do? Where's that money supposed to come from?
Some people who don't have the funds on hand to pay their taxes often consider paying them with a credit card. Though this is a very convenient way to make your tax payment, there are pros and cons to this method. If you're thinking about using a credit card to pay your taxes, take both the positive and negative aspects of this approach and then decide if it's the right way for you to go.
Pros of Paying Your Taxes With a Credit Card
PRO - Convenience
Quick and easy. No checks to write or concern that your payment will make it through the mail on time. Just one phone call or a few clicks of your mouse and your tax bill is paid. Yes, very easy indeed. However, there are consequences involved so be sure to read past the PROs and make your way to the CONs.
PRO - Rewards
Some credit cards allow you to get rewards on different types of purchases - taxes being one of them. Be careful though, some cards have restrictions on the type of purchases that are actually qualified to get rewards. And if they do permit rewards on tax payments, the amount you receive (possibly 1% - 2%) probably won't cover the fees you'll be paying. (You'll read more about fees when you reach the CONs section.)
Cons of Paying Your Taxes With a Credit Card
CON - Fees
Since the IRS can't take credit card payments directly, they have payment processors who take the payments on their behalf. These companies charge an additional fee, which the IRS calls a "convenience fee", that can be up to 2.49% of your tax bill. So, for instance, if you place $10,000 of your taxes on your credit card, you'll pay about $250 in fees.
CON - Interest
The longer it takes you to pay off your credit card balance, the more you'll pay in interest. Although using a low-interest credit card can help lower the amount of interest paid, it's still a cost that you need to consider when deciding whether or not to use a credit card to pay your tax bill. Will the interest payment exceed the cost of working with the IRS on a short- or long-term payment plan? Would it cost less to take out a loan or use a small amount of your HELOC to pay your taxes?
CON - Creditor Concern
By placing such a large amount on your card may be a sign to your credit card issuer that you're having financial issues. This increased risk might cause them to raise your interest rate or even lower your credit limit. In addition, a large balance may increase your credit utilization thus lowering your credit score.
If your only reasons for making your tax payment with your credit card are for the rewards and convenience, it's important to ensure the following requirements can be met:
Your card can earn rewards of at least 2% cash back for your tax payment
Your credit limit is high, so your credit utilization stays low
Your plan is to pay your new balance in full or place the balance on a card with 0% interest and pay it off before the interest rate increases
myFICO members have paid their taxes in a variety of ways. See what worked best for them at myFICO forums.