SEATTLE -- If you typically owe money on your taxes each year, how do you usually pay that bill?
If you answered "with my credit card," we've got a few reasons for you to rethink that.
Consumer reports looks into this topic and concluded that paying your taxes with a credit card can cost you more money in the end.
Why? There are a few reasons.
- Companies that process credit card payments for the IRS are going to charge you a fee to do so. It's usually calculated as a percentage of your tax bill, about 1.69 to 1.99 percent. If you have a $1,500 tax bill, you'll pay an extra $30 if your fee is 1.99 percent.
- Are you going to be able to pay that credit card off right away? If you carry a balance, you're looking at paying more in added interest each month. According to consumer reports, the average credit card interest rate is about 17.5 percent.
- If you're using a credit cards for rewards, make sure you can pay in full, because interest rates or late fees will likely negate the rewards you would receive.
So what's the best way to pay? Here are a few suggestions:
- Try applying for a credit card that has a 0% APR introductory rate. But make sure you have a plan to pay off the balance before the introductory rate ends.
- If your tax bill is daunting, the IRS has a payment plan. The payment plan is Form 9465. Fill that out, and the IRS will set up a plan that can last as long as six years. There is a set-up fee, though, which consumer reports say can cost $31-$225. The fee will be lower if you arrange for automatic payments from your bank account.
- Consumer reports also suggest a home equity line of credit, which may get you a far lower interest rate than any credit card. But if you go this route, you can no longer deduct interest from debt related to building, buying or improving your home.
It's worth noting that the money you owe in taxes will not have a negative impact on your credit score.