Q. How can paying my taxes with a credit card potentially affect my credit score?
A. Choosing to pay your taxes with a credit card isn’t going to have a significant effect on your credit score if you can pay the subsequent bill off on time. If, however, you are unable to pay the balance due back at the end of the month, your score is definitely going to take hit.
As reported, delinquent credit card payments can cause person’s score to take up to a 100-point plummet at least until the debt is paid. Tax debt typically incurs a drop on the higher end of the scale, although not because it has anything to do with the IRS.
“Charging your tax liability likely means you're charging a significant amount of money,” John Ulzheimer, president of consumer education for SmartCredit.com, explains. “Credit scoring models can’t tell the difference between a $5,000 tax payment, a $5,000 cash advance and $5,000 of electronics. The significantly increased credit card balance can spike your credit utilization percentage and leave you with lower credit scores.”
“You’re converting IRS debt into unsecured revolving debt,” he says. “This means in the worst-case scenario you could discharge the debt in a bankruptcy, which you can’t do with IRS tax liens.”
Of course, it all comes down to carefully weighing out your options,
According to Ulzheimer, a bankruptcy is going to have more of a negative impact, points wise, on your credit score, since it affects multiple accounts on the same credit report. While the exact effect will vary depending on a consumers’ credit profile, it can typically turn a 680 into a 540, a 720 into a 540 and a 780 into a 550.
Comparatively, a tax lien can change a 680 into a 580, a 720 into a 580 and a 780 into a 630. But a tax lien can end up affect your credit score for a longer period of time since they are since they are notoriously difficult to have withdrawn from your credit file.
Once settled, Ulzheimer says, the lien will remain on file for 7 more years. A bankruptcy, conversely, typically impacts your score for about ten years, but the recovery process starts from the date the bankruptcy is filed.
“If you're going to file bankruptcy anyway, it's better to have the IRS debt paid by credit card so it can be dischargedi,” he says. “It’s the lesser of two evils.”
Want to know what affects your credit score? E-mail your questions to MainStreet at firstname.lastname@example.org.