Two financial stressors in many of our lives are credit and taxes. We work hard to earn our money and build good credit – and no one necessarily enjoys paying taxes. The good news is even if you have bad credit, the IRS does not consider your credit score when determining your tax bill. The bad news, however, is that you’re not completely off the hook – because the act of not paying your taxes (or paying late) could indirectly impact your score. The clock is ticking on this year’s tax deadline. For best credit results, here’s what you should know if you want to grow your score.
Be on time.
This year’s tax deadline is Monday, April 15th so make sure to file on, or before, this date. If you need more time, you may want to file an extension.
If you qualify for a refund, use it responsibly.
Getting a tax refund won’t directly affect your credit – but if you use the money wisely, it could help you boost your score. Put that windfall to good use by resolving negative debt from the past and paying down your current bills from the present. Both actions could help improve your credit over time.
If you owe, pay promptly.
Not paying a tax bill could lead to failure-to-pay penalties, a tax lien on your property, seizure of your assets, passport restrictions, offsetting of future tax refunds, or even federal tax evasion charges.
Obviously, you’ll want to avoid these problems by making sure that if you owe taxes, you pay them promptly. If you have the funds to cover your tax bill, the easiest and most credit-friendly route is to take a deep breath and pay the bill. If not, whatever you do, don’t avoid it. Here are some options that may be able to help.
• Enter into an installment agreement with the IRS
The IRS does not directly report financial activity to the credit bureaus. With that said, entering into an installment agreement such as this won’t necessarily impact your score – but it could help you stay out of the red if you can’t pay your bill on time. If you are able to pay the balance in 120 days or less, there are no fees for the IRS’s short-term payment plan. If the 120-day mark isn’t enough time, long-term payment plans are available with setup fees starting at $31 and up. Please note that penalties and interest will continue to accrue until the balance is paid in full.
• Take out a personal loan
Another option is to take out a personal loan. To limit the number of credit checks that may show up on your report, find out the minimum credit requirements from various lenders. Then, check your scores to see if they satisfy those terms. Here’s why. Lenders typically conduct hard credit inquiries which could damage your score. However, soft credit checks, like when you check your scores at ScoreShuttle, do not impact your creditworthiness – so it’s best to know if your scores meet the lenders’ expectations before taking the time and credit energy to apply. The higher your score, the more likely you are to qualify and ideally get a low interest rate.
• Use your credit card
Caution: using a credit card to pay a large tax bill (or any bill) that you do not currently have the funds to back-up should be used as a last resort. If it comes down to this or a default, you could consider paying with plastic. That said, keep in mind that a large tax bill could put you over the ideal 30% or less credit utilization threshold. If your credit utilization ratio goes too high, it could negatively affect your credit. If using your credit card would take you close to your credit limit – or if you can’t pay off the bill in full soon thereafter, you may want to think twice about using this option.
Please note that this is not a comprehensive list of payment options and there may be other pros and cons to each option mentioned above. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
Disclaimer: ScoreShuttle is not an accounting firm and does not provide any legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on, for tax, legal or accounting advice. If you have questions about your taxes – or, if you would like further details about payment options, please consult a tax professional.