Should I Pay My Taxes with a Credit Card?

These days, we use multiple credit cards for everything, from groceries to bills, to clothes and books. Paying with a credit card has certain benefits and drawbacks, depending on the purchases you make, but what about those pesky taxes? When it comes time to pay Uncle Sam, should you whip out the plastic and hope for the best? Or should you try to come up with the cash? Paying your taxes with a credit card might be a good idea, but make sure you consider all your options.

Why Would You Use Credit?

Most people pay their taxes with their bank accounts, after hopefully saving money throughout the year to put toward this very purpose. However, some people arrive at April 15 without sufficient cash in the bank, which means that they must pursue alternate methods of paying. According to the IRS web site, taxpayers who are unable to pay their taxes in full must set up an installment plan or file a request for an extension. Either way, the taxpayer will incur interest fees on the balance owed.

Benefits of Using Credit

For some people, paying taxes with a credit card is actually the most beneficial method. For example, if you've just signed up for a new card with a 0% introductory APR, you might be able to skate through six months of minimum payments without having to pay an extra dime. This would obviously be preferable over an extension with the IRS because in that situation, you would wind up paying interest.

Furthermore, if you pay your taxes with a rewards credit card, you can actually benefit from the transaction rather than suffering a loss. Many credit cards offer rewards programs in the form of cash back, gift certificates or other incentives that can make carrying a balance somewhat attractive. Even if you can afford to pay your taxes in full, it might be worthwhile to put it on plastic to get the rewards, then pay it off when the bill arrives.

Drawbacks of Using Credit

Of course, paying taxes with a credit card isn't always a good idea. If you aren't good at managing money, or if you already carry a high balance, putting your taxes on plastic can sink you further into debt, and result in negative items on your credit report. People who have trouble paying their bills or who use credit as a safety net could find themselves in big trouble, especially since taxes don't qualify for exemption when you file for bankruptcy.

Additionally, if you have a high-interest credit card (more than 10% or so), you'll actually be paying more for your taxes with plastic than if you filed for an extension. According to the IRS, the late fee charged by the IRS is typically 1% of whatever you owe. If you pay it off in two or three months, the damage as far as interest won't be that severe.

Alternatives to Credit

If you've decided that you don't want to pay your taxes using a credit card, but you can't afford to pay the IRS what you owe, there are still options. For example, you might talk to friends or family members about a short-term loan. Offer to pay interest on whatever you borrow, then set up a written agreement for the terms of repayment. Alternatively, you might take out a loan with a bank or credit union for the purpose of paying your taxes.

4 Reasons to Pay Your Credit Card Bill in Full

Do you dread each month when you are looking at your credit card bill? You are like many Americans who are overwhelmed with credit card debt. However, it is vitally important to your finances to get this under control as quickly as possible. I am going to list some reasons why it is important to pay your bill in full each month. If you are unable to pay the bill in full, you need to consider creating a strict budget and sticking to it, as well as consider obtaining a lower interest rate loan to pay your balances off, or even consider applying for a new card that allows interest free transfers for a certain period which will allow you to quickly pay the debt off.

Reason #1. Your credit rating. If you are only paying the minimum payment each month, you are setting yourself up for problems here. It is very important to keep your credit rating as high as possible so that your credit card balance does not provide a problem when you are looking to purchase a home or car. You want to make sure payments are paid off as quickly as possible.

Reason #2. Interest. Each month the balance is not paid in full, you are incurring interest charges. I liken this to going outside, making a nice little bonfire, and placing the money in your wallet in the fire one bill at a time. You are doing no better by carrying the balances on your bill. Interest rates are quite common to be around the 15%-20% range sometimes higher depending upon your credit score. This is a lot of wasted money each year that could be spent on things your family wants or needs.

Reason #3. This is similar to Reason #2. If you make a great purchase online for a wonderful item at a killer, price and you pay with your credit card you are not saving any money! If you save a couple of hundred bucks on the price of the item, but pay several hundred dollars in interest fees you are not saving any money, and are in fact paying more! Credit cards can hurt you in this respect.

Reason #4. Budgeting. If you are using your credit cards to pay your bills without paying off the balance every month then you have a budget problem somewhere. If you cannot afford to pay the balance each month then you need some serious budget revisions. When you are having to use credit cards to merely make ends meet there are huge budget problems that can create devastating effects on your credit report. There are several consumer-financing companies that can assist you in reducing your monthly bills, as well as getting a workable budget set up so that you are able to pay your bills each month.

As you can see, credit cards can be either good or bad for your budget, finances, and credit file. You want your credit to be as spotless as possible, and dragging balances over months is never a good idea. Good luck with all your credit cards and you should be able to work out all budget issues quickly with some work.

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