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.