While it’s simple and hassle-free, paying taxes with a credit card has advantages and downsides. It’s important to look at both before making a choice. We’ll walk you through the plusses and minuses.
Pros
Before you go in on covering your tax bill with a credit card, factor in the pluses and minuses. Here are some of the advantages of going this route:
Convenience
When you pay your taxes with a credit card, you don’t have to drop a check in the mail or step inside your local tax collector’s office. When you pay taxes with a credit card, you can do so online. This can be a huge time saver.
More time to pay
As the money owed on taxes is now part of your credit card balance, you can spread out your payments if needed. However, while you’ll have more time to pay off your tax bill, you’ll have to pay interest – which we’ll dig our heels into more in just a bit.
Reap sign-up bonus minimums
Do you have your eye on a sign-up bonus? Maybe a credit card you just opened offers $200 in cash if you spend $500 in the first three months. Your tax bill is a large-ticket item, so paying Uncle Sam with your credit card can help you spend enough to snag a sign-up bonus.
Earn credit card rewards
You can rack up some credit card points by using your card to pay taxes. Check the “earn rate” on your credit card, which is the number of points you’ll earn for each dollar spent. Some credit cards offer a higher earn rate for online purchases.
Benefit from special financing
If you’re enjoying a special offer on your credit card – think 0% APR for a limited time – you might want to put what you owe on taxes onto your card. You can save on interest if you pay off your taxes before the promotion period ends.
Cons
While paying taxes with a credit card has its perks, there are some financial downsides.
Processing fees
At first glance, a 2.0% processing fee seems like a manageable chunk of change. But if you have a steep tax bill, a 2.0% add-on charge could result in sticker shock. For example, a 2% processing fee of $5,000 is $100. If your bill is $10,000, you’re looking at a $200 fee.
High interest charges on unpaid balances
Remember how long it took to pay off that new pair of sneakers or gaming console you put on your credit card? Now, imagine dealing with a larger-ticket purchase that could be hundreds – or even thousands – of dollars. Last year, the average interest rate on a credit card was 24.24%.4
While it’s tempting to take your time in paying off the credit card simply because you can, you could be paying a lot in interest fees. For example, let’s say you have a $5,000 tax bill and put the entire amount on your credit card.
Using Chime’s credit card payoff calculator, we’ll figure out how much your interest fees will be. If it takes you five years to pay your credit card bill and you have a 24% APR and $143 monthly payments, you would pay $3,670 in interest fees alone.
High credit utilization rate
Credit usage makes up 30% of your credit score. In turn, higher credit utilization rates can mean lower credit scores. Ideally, you’ll want to keep your credit usage to no more than 30% – the lower, the better. Adding a large tax bill onto your existing credit card balance will increase your credit utilization, which can damage your credit.
For example: You have two credit cards and the credit limit is $10,000 across both cards. You currently have a total balance of $1,000. Putting a $2,000 tax bill on your card would bring your credit usage to 30%, or $3,000, against a $10,000 limit.
Can impact your available credit
Besides high credit usage, paying taxes with your credit card also means you have a lower available credit limit. That means less credit to tap into for other things that pop up.
Not many rewards
There are plenty of credit cards where you can earn rewards by shopping online, buying groceries, and booking travel. But a credit card that offers you rewards for paying your taxes? Those are few and far between.
