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Paying Taxes: What You Need to Know to Protect Your Credit

by Jeremy S (writer), , April 03, 2014

Credit: www.flickr.com
Paying Taxes

As in most years, tax day 2014 falls on April 15. It's important to keep in mind that if you don't file your return in time, you face stiff penalties.

As in most years, tax day 2014 falls on April 15. It's important to keep in mind that if you don't file your return in time, you face stiff penalties. Even if you have no way of paying your taxes, you should at least file.

When it comes to paying, you can make use of a number of alternatives. You may even seek an extension or find credit to pay with. The taxpayer education blog at LibertyTax.com has a great deal of accessible information in this area. Here are a few things that you need to keep in mind if you find yourself needing to tap your credit to pay your taxes with.

What happens when you pay your taxes with a credit card?

If you have the money, it's best to use a debit card or check to pay your taxes with. The IRS certainly does accept credit cards. Credit cards, however, cost you dearly in a number of ways.

To begin, the payment gateway that you go through to have your payment processed comes with a convenience fee that's as high as 2.49%. This means that for every $1,000 that you owe the IRS, you end up paying $24.90. This can be an unnecessary expense.

You also need to take into account the effect on your credit

If your tax bill is a large one, paying it with your credit card can have an undesirable consequence - you'll end up using so much of the credit available to you that you will send your credit card utilization rate way up. High utilization rates make you look desperate to the credit scoring companies. They will right away lower your credit score by a few points. When this happens, the credit card company could take note, too - they could put you down as a higher credit risk and raise your interest rate.

What if you take out a personal loan to pay your taxes with?

Some people try to take out personal loans just for the taxes that they owe. If you need to take out a loan, you'll need to allow yourself plenty of time. Shopping around for a loan, checking out the best rates everywhere and going through the application process can't be hurried. It's important to remember, though, that applying for a new loan can dent your credit score.

Each time you make a new credit inquiry, the lender checks your credit out by tapping your report at a credit reporting agency. While a couple of inquiries have practically no effect on your credit score, multiple inquiries certainly do wear it down. If you repeatedly ask lenders for a loan, the credit rating agencies sees it as a sign of desperation for money.

When you do get a loan, it will add to the amount of existing debt that you already have outstanding. Having a large amount of outstanding debt will affect the way your debt-to-income ratio looks.

There's just one good thing that comes out of taking out a loan - if you are on time with your monthly payments, over time, your credit score will benefit from it.

It can seriously affect your credit if you don't pay your taxes

If you don't pay your taxes, the IRS will usually file to have a lien placed on your property. This will show on your credit report and slash it by at least 100 points. Before you get to this stage, it's important that you try to appeal to the IRS for some help. You can apply by April 17 for a 4-month extension or even ask about paying your taxes in installments. It should never come to defaulting altogether.



About the Writer

Jeremy S is a technology nerd of many years. He is always on the lookout for new devices, and then he writes about them on a variety of Internet blog sites.
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