The tax deadline is coming up and anyone that has been procrastinating the inevitable should be getting to work soon. The IRS has reported that eight out of every ten American taxpayers received a refund. That means two out of every ten will owe money to Uncle Sam come April.
1099 workers do not have taxes taken out of their pay, which means they are responsible for setting aside money to pay estimated taxes. If the amount they pay is not enough then it’s likely they will be the group that owes. You have two main choices, you can either pay the amount owed straight from your checking account or you can use a credit card.
Credit cards are a popular choice, but only in certain situations are they really a good idea. Here are three reasons why you shouldn’t be using a credit card to pay your taxes and one BIG reason why you should.
Reasons not to use a credit card to pay taxes
Increases credit utilization
Credit utilization makes up roughly 30% of a persons FICO score. If you charge your taxes to your credit card then this ratio could spike, which could lower your credit score. As an example let’s assume that you have one credit card with a credit limit of $7,500. If you have a tax bill due of $5,000 that would mean you are using 67% of your available credit. You should try your best never to exceed 30% credit utilization ratio.
You face high processing fees
When you use a credit card to pay your taxes there is a processing fee involved. This fee depends on the third party company that you use and can range anywhere from 1.87% and 2.35%. The rewards that you can earn from a lot of credit cards will not cover the cost of these fees.
High-interest rates
Most people that choose to use a credit card to pay their taxes do it for one reason. They don’t have the money in the bank to cover the expense. That likely means they are not going to be able to pay off the credit card bill at the end of the statement period, which means interest will start accruing and your costs will increase.
Why you should use a credit card to pay your taxes
The value of the reward can be high
Let’s assume that you just applied for a new credit card that has a high signup bonus. If you don’t feel like you can complete the minimum spend that is required to receive that bonus, then paying your taxes with a credit card might be a great option for you. Because fees start at just 1.87% of the total amount you are paying then it can easily work in your favor. Most signup bonuses are worth much more than 1.87%.
Using a credit card to pay your taxes would also be beneficial if you have a high earning credit card. For example, if you have a 2% cash back card and you pay a fee of 1.87% then you just profited 0.13% by making your tax payment. You can also assess the value that you will receive any miles or points earning rewards card. If it were higher than 1.87% then it would be a great deal.
