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TheStreet Open House

Don't Pay Taxes with a Credit Card

NEW YORK ( LowCards.com) -- Tax Day is less than a month away. This is the time credit card issuers start encouraging customers to use their cards as a convenient way to pay their tax bill.

Even the IRS promotes the benefits of using a credit card to pay taxes. The IRS website says payment with a credit card is "convenient, safe and secure," and reminds taxpayers that if they are enrolled in a rewards program, they can earn miles, points and cash back.

It may be convenient, but it's certainly not free.

Credit card payments to the IRS are processed by third-party providers. These companies charge a processing fee, which averages 2.35% but can be as high as 3.93%.

If your tax bill is $6,000, a processing fee of 2.35% will cost $141, which is rolled into your credit card's balance. If you don't pay off your balance in its entirety at the end of the month, you will begin to incur interest rate charges on the $6,141 balance. Depending on the account's APR, that can be an extremely costly way to pay your taxes.

If you have no other available options, here are a few tips for paying your taxes with a credit card:

  • Find out your credit limit before you charge your taxes. Debt utilization is a major factor in credit scores. If you use too much of your available credit, you can hurt your credit score.
  • Do not write your credit card number on your tax return.
  • Make sure your payment is treated as a purchase, not a cash advance. The cash advance APR can be 25% and the cash advance fee varies from 3% to 5%, depending on the issuer.

Using reward points to pay taxes
Using a reward credit card to pay taxes is not an easy way to earn reward points to pay for your summer vacation. The average reward is 1% of a purchase, or 1 cent per dollar spent. This is much less than the 2.35% processing fee. You will save money writing a check for the taxes and paying cash for your vacation.

American Express (AXP) allows you to use rewards points toward your tax payment and convenience fee on officialpayment.com and pay1040.com. To pay off $5,000 in taxes, though, a cardmember would have to charge $1 million -- it takes 200 points to pay off $1 in taxes.

Other payment options
If you can't afford to pay your taxes, look for other options.

  • An installment plan with the IRS is one possibility.
  • Your bank or credit union may also give you a personal loan with a lower interest rate than your credit card's APR.
  • You can also pay with a debit card, and the fee is much cheaper. For example, you will be charged a flat fee of $3.89 when you use your Visa (V) debit card.

-- Reported by Bill Hardekopf of LowCards.com.

Bill Hardekopf is chief executive of LowCards.com, which compares and rates more than 1,000 credit cards. He is the co-author of "The Credit Card Guidebook."

LowCards.com simplifies the confusion of shopping for credit cards. It is a free, independent website that helps consumers easily compare credit cards in a variety of categories such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates. It also gives an unbiased ranking and review for each card. The LowCards.com Complete Credit Card Index is the most objective and comprehensive resource on the Internet, allowing consumers to compare rates for more than 1,000 credit cards offered in this country. Created by Hampton & Associates, the company has been analyzing the credit card industry and supplying objective websites on various consumer expenses for 11 years.

For information, contact Bill Hardekopf at 1-800-388-1910 or billh@LowCards.com.

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