As tax season is here, many consumers might wonder how they'll pay the IRS this year.
You canpay taxes with your credit card, but it usually comes with fees. At minimum, there will be a payment processing fee ranging from 1% to 2%. TheIRSbreaks down the fees for each payment processor here.
On top of payment processing fees, your credit card will charge you interestunless you pay your balance off at the end of your billing cycle (averaging around 15.78% according to theFed'smost recent data).
But there are times when charging taxes on your credit card could make sense, even though it's not usually advised. Selectspokewith Ashley Patrick of Budgets Made Easywho used a 0% APR offer that came with herBank of America® Customized Cash Rewards credit card to pay $6,000 in taxes in 2015.
Why Patrick decided to use a credit card
At the time, Patrick had somemoneyin savings, but she didn't want to drain her emergency fund to pay her tax bill. She and her husband wanted to pay it over time, and when she got the 0% offer from her credit card, it gave her the opportunity to pay her taxes interest-free over 18 months (though Patrick and her husband were able to pay it off more quickly).
Patrick and her husband have since taken steps to ensure they are more financially prepared and rely less on credit cards for big expenses. The couple now has six months' worth of savings, no debt and they pay their credit card balance off every month.
"My experience using [my credit card] was pretty easy," Patrick says, explaining it prevented her from being stressed out because she didn't owe money to the IRS and she didn't have to use all of her savings.
It also inspired her and her husband to overhaul their finances.When they couldn't come up with enough cash to pay their taxes, they decided to get a firm idea of how they were spending and learnedhow to savemore. They cut their dining out budget in half and put that money toward paying down debt.
"Owing the money on the credit card is what sparked my search for debt payoff plans," says Patrick, who went on to pay off a $14,000 car loan and $25,000 worth of student debt promptly after repaying the credit card.
"It was the catalyst that started us on the journey to financial freedom," says Patrick.
Now, Patrick and her husband have six months' worth of savings in an emergency fund. Experts say that putting money into a high-yield savings accountis one of the best ways to stay ahead financially because, when unexpected expenses arise, you're prepared.
"Financial freedom to us is not worrying about the next paycheck," explains Patrick. "Not worrying about if my husband loses his job ... Even now with Covid-19, my husband lost 25% of his income and we aren't stressed. That's financial freedom to me."
When you might want to use a 0% APR credit card
If you have to make a large payment you haven't had time to save for— a big tax bill or an emergency expense — a 0% APRcredit card, like thetheCiti Simplicity® Card(see rates and fees) or theU.S. Bank Visa® Platinum Card, can be a good back-up.
Keep in mind you need good to excellent credit to qualify for these and other best no-interest cards. And once you're approved you often have to wait for the card in the mail, unless you get a card with instant access.
But if you have limited time, you can check to see if one of your current credit cards has a 0% APR offer in the form of a convenience check, which is what Patrick used.Convenience checks often count as cash advances, which come with their own fees. Make sure to do the math to see if the money you save on interest is greater than what you have to pay in fees.
Options when you can't use a credit card
If using a 0% APR credit card is not an option, another option is a short-term personal loan.
Personal loans have lower average APRs than credit cards (around 9.5% according to the Fed). Your rate is usually fixed, which means that you will make the same monthly payment until the loan is paid off. You can pay back a personal loan over just a few months or up to three years and sometimes even longer. Longer term lengths typically have higher APRs.
Getting a personal loan can sometimes be easier than getting approved for a new credit card, which is something to consider if you have a fair or average credit score. This is particularly important to keep in mind whilecard issuers are tightening requirementsfor new credit cards.
Bottom line
Paying taxes with your credit card isn't recommended, as it comes with processing fees and the possibility of paying interest if you can't pay off the balance right away. But if that choice is the only one available to you, it could be better than owing the IRS.
If you're considering using a credit card to pay taxes, be sure to double-check the APR offer and map out your debt repayment plan. Also, you may consider looking for ways to revamp your budget, set new savings goals and get motivated to pay off any other debt.
Read more
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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
