by Bill Hardekopf
April 15 is less than a month away and hearts start pounding a little faster as thoughts turn to taxes. This is also the time that credit card issuers encourage customers to use their cards as a convenient way to pay their tax bill. It may be convenient, but it's certainly not free.
Even the IRS promotes the benefits of paying taxes with a credit card. The IRS website says that 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.
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% (charged by FileYourTaxes.com).
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 card's balance in its entirety at the end of the month, you will begin to incur interest rate charges on the $6,141 balance, which, depending on the account's APR, 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. If you are maxing out your credit cards, you are considered a high risk and could pay the highest interest rates. If charging your tax payment pushes you significantly closer to your credit limit, expect a drop in 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%-5%, depending on the issuer.
Using Reward Points To Pay Taxes
Using a reward 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 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 allows you to use rewards points toward your tax payment and convenience fee on officialpayment.com and pay1040.com. However, to pay off $5,000 in taxes, 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 Debit card (pay1040.com).
Bill Hardekopf is CEO of LowCards.com, a site that 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.