Why You Shouldn't Pay Your Taxes With a Credit Card

If you're in a financial crunch and owe the IRS this year, you might be tempted to pay your tax bill with your credit card. In a word: Don't. Bill Hardekopf, chief executive of LowCards.com, gives these reasons NOT to use your credit card to pay your tax bill.

You'll pay a fee to the third-party contracted by the IRS to handle credit-card transactions -- in addition to the interest rate your card charges if you carry a balance. Most third-party providers charge 2.45% (which will add $122.50 to a $5,000 tax bill), but some charge almost 4%.

Those credit-card rewards points aren't generous enough to compensate for the high processing fees you'll be charged for paying taxes with your card. Hardekopf says cardholders used to be able to make a little money from paying taxes with their card when card companies offered 3% to 5% cash back on purchases. But most rewards cards offer just 1% cash back now, which is less than the 2.45% (or more) processing fee you'll have to pay.

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Your credit score could take a hit if the amount you charge to your card puts you near your credit limit. Your credit-utilization ratio -- the total of your card balances divided by the credit limits on all of your cards -- will rise and your score could drop because your balance will account for a higher percentage of your credit limit.

Other options

Consider a low-interest personal loan from a bank or social lending network, such as LendingClub.com and Prosper.com.

The IRS installment plan lets you pay the tax you owe in monthly installments. It does charge a $105 set-up fee ($52 if you make payments automatically from your checking account; $43 if your income is below a certain level). You'll also pay interest (currently 4%) and a .25% a month late payment penalty, bringing the cost closer to 7% a year. However, that rate likely is lower than what you'd pay your credit-card company (the average is 13.9% on variable rate cards). Use Form 9465 to request the installment plan.