Avoid Using a Credit Card to Pay for Taxes
NEW YORK (TheStreet) -- The tax deadline is 2 ½ weeks away and consumers will soon be bombarded with messages encouraging them to pay with a credit card.
While this may sound appealing to consumers struggling to find ways to pay taxes in this turbulent economy, it should be avoided at all costs.
The IRS and some credit card issuers promote the benefits of paying taxes with a credit card. Payment with a credit card is easy and can be made via phone or online. It delays the pain of payment for another month. Consumers can even earn reward points on some cards.
But credit card payments of taxes are actually made to third-party providers, which are contracted by the Internal Revenue Service. Processors charge from 1.95% (payUSAtax.com) to 3.93% (FileYourTaxes.com). Most third-party providers charge a 2.35% fee for processing a tax credit card payment, making this a costly convenience.The 2.35% processing fee adds $117.50 to a $5,000 tax bill. If you don't immediately pay off the credit card bill, interest charges from your credit card will add even greater penalties. Since interest rates have increased significantly over the past year, this makes paying your taxes by credit card even more costly. Along with this significant processing fee and possible interest penalties, consumers should also consider other factors: 1. Know your credit limit before you charge your taxes. If you are anywhere close to your limit, this is not an option for you. Issuers are now sensitive about debt loads and customers who are close to their limit. This sends a warning to issuers that you are a risk for default. If this payment puts you close to your credit limit, it can raise your credit utilization score, an important factor in your credit score. This can result in a lower credit score and higher interest rates from your lenders. 2. Verify that the tax payment will be treated as a purchase and not a cash advance. Cash advances come with a high interest rate and typically a 3% cash advance fee. 3. Be careful how you provide your credit card number. The IRS warns filers not to write the credit card number on the return and not to mail in the credit card. 4. If you can't afford to pay your taxes now, there are less expensive options than a credit card loan. An installment plan with the IRS is one possibility; the interest rate is currently 4% percent for underpayments. Another option is a personal loan with a bank or credit union. 5. Obtaining reward points for using your credit card is not a good reason to charge your income taxes. Several years ago, generous credit card reward programs offered 3% to 5% cash back, and some cardholders were able to make a little money by paying their taxes with a reward card. Since the typical reward card now offers 1% back for cash, points or miles, the 2.35% processing fee will cost more than the rewards you can earn.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV