3 Things to Think About When Paying Taxes by Credit Card

December 21, 2015 | By: Miranda Marquit

When it comes to paying your taxes, the IRS is versatile. The agency is happy to accept most forms of payment, from checks to automatic withdrawals to credit cards. You can even set up an installment plan to pay the IRS if you aren’t sure that you can afford to make your tax payments on time.

Paying with a credit card can be a smart move if you’re careful. Before you decide to share your credit card information with the IRS, consider the following:

You Might Be Stuck Paying a High Rate of Interest

Many people like the idea of paying their taxes with credit cards to earn the rewards. That’s instant travel miles or cash back if you make a significant tax payment with your credit card. However, this strategy only works if you can pay off the credit card quickly. Otherwise, you’re stuck paying a high rate of interest.

Consider: If you are receiving 2% cashback from your credit card, it’s really not that much when compared with the 17.99% interest you’re paying on that balance. Even if your tax payment results in a big bonus, such as a free airline ticket, your interest might still be so high that it negates the value.

Often, the interest charged by the IRS for an installment plan is less than what you’ll pay on a credit card. Run the numbers. If you can’t pay off the credit card, it might not be worth it to use it for your taxes.

You Could Be Repaying Your Taxes for Years

When you use a credit card to pay, you are taking out a loan. If you pay off the balance immediately, no harm done. However, if all you do is make the minimum payment, you could be paying your card down for years. If you don’t pay attention, it could take you 10 years or more to pay off your tax bill. When you choose an installment loan with the IRS, you can usually pay off the amount in much less time — and save money on interest.

If you don’t want this year’s tax bill haunting you for the next decade or two, avoid the long-term credit card strategy. Make sure you can pay down the card as quickly as possible, and stay away from the temptation to pay only the minimum.

Variable Rates Could Mean Higher Costs Down the Road

Remember that most credit cards have variable rates. This means that you could end up paying even more in interest later if you carry your balance. A higher rate also means that you have the liability longer — especially if you only pay the minimum required by the credit card issuer. A fixed-rate loan at least lets you know exactly what you pay.

Yes, it can make sense to pay with a credit card. But it only works if you have a plan to get rid of the balance before the interest can cost you extra. No rewards are worth the costs if you don’t have a plan to pay off your balance quickly. If you don’t have the ability to pay down the balance fast, don’t use a credit card to pay your taxes.