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Don’t Pay Taxes With Credit Cards

If you’re one of the many taxpayers who owe the Department of the Treasury some money, you might be tempted to pull out the plastic and push the payment decision off another month. Or maybe you’re thinking about paying with a credit card for the rewards. Or maybe you can’t pay and think putting it on the credit card is your only option. Whatever the case, paying with a credit card is probably the worst way to pay your taxes.

Processing Fees

There are three companies listed on the IRS website for paying taxes by credit card [3]:

Unless you have a credit card that will give you more than 2% cash back rewards (I am not aware of any), this is a lose lose proposition. If you pay with a credit card, not only are you charged the fee, you also pay interest if you can’t pay it off in a month. If you want to go the credit card route because you can’t pay, it’s better to get a 0% balance transfer [4], pay the transfer fee, and then have a 0% loan for 12-15 months.

IRS Payment Plan

The IRS offers payment plans [5] that aren’t perfect but beat paying the double digit interest rates the credit card companies charge. You will be assessed penalties and interest (based on the applicable federal rate [6] plus 3%) but the interest rate is much lower than a credit card’s rate. You will have to factor in the agreement fee and see how it compares to your tax liability.

It almost never makes financial sense to pay your taxes with a credit card. If you’re in a drastic scenario in which you can’t get a bank loan or a 0% balance transfer, consider a social lending network [7]. The process will take some time but the interest rate should be better than your credit card’s rate.

Just avoid the plastic!

(Photo: thetruthabout [8])