Avoid Paying Taxes with Credit Cards--Use Tax Refund to Pay off Credit Cards

April 15 is approaching and credit card companies are promoting the benefits of paying taxes with credit cards. Chase happily advertises that you can "pay your taxes with a smile" and that credit cards are the easy way to "pay the IRS on your schedule in a way that suits your needs."

The advertising and convenience of paying with a credit card is working. The number of taxpayers using credit cards grows each year. According to the IRS, almost 2 million taxpayers paid with a credit card in 2006-a 36% increase over 2005.

While using a credit card is convenient and the extra rewards are tempting, it's certainly not free. Taxpayers using a credit card will pay a convenience fee of 2.49% of their payment.

"Paying taxes with a credit card is now widely accepted and even encouraged by the issuers. But this is not a good idea for consumers," says Bill Hardekopf, CEO of LowCards.com.

"It makes no sense to the 46% of households that carry a balance on your credit card account. If your tax liability is $8,000, you will pay $200 just for the convenience of using your credit card. If you don't pay it off immediately, you could pay an additional $99 per month in interest (using the average APR of 14.9%)," says Hardekopf

Consider this option only if you pay off your balance each month and the value of the rewards you receive will be worth more than the 2.49% fee you will have to pay. Pay attention to the offer and the deadlines for payment. All credit cards are accepted as payment, but only a few offer bonus miles. United Mileage Plus Signature Visa and the Jet Blue Card from American Express offer double miles for every $1 paid. Jet Blue does limit this promotion to 10,000 miles per account and payment must be made by April 17, 2007.

American Express offers one membership reward point for every $1 charged toward taxes. "American Express gives you the opportunity to pay the fee with your reward points. This is really crazy--you are just wasting reward points to pay a fee that you shouldn't be paying anyway," says Hardekopf.

If you do make your payment with a credit card, do it correctly. The IRS has contracts with two companies to accept credit card charges: Official Payments Corporation and LINK2GOV. You may pay by phone or online. Do not forward your credit card information into the IRS and do not write the credit card number on the form.

"The emphasis on credit cards and taxes is backwards. Households should use their tax refund to pay off their credit card debt instead of using their credit cards to pay their taxes. Refund money is a great opportunity to get ahead--to reduce your debt and decrease the amount you are paying in interest each month," says Hardekopf.

Additional Changes Congress Should Make in Credit Card Industry

Additional Changes Congress Should Make in Credit Card Industry

Thanks to Congressional hearings, outrageous credit card practices like universal default and two-cycle billing are getting attention and action. While the spotlight and heat are on the credit card companies, there are three additional practices that need attention from Congress and consumers.

1) Stop the practice of convenience checks. Credit card issuers aggressively promote the use of convenience checks, making the checks very easy to use without clearly stating what the user is signing up for. "I get convenience checks all of the time from my credit card company-each month with my statement and again separately in the mail," says Bill Hardekopf, CEO of LowCards.com. "They include a letter that tells of the exciting things you can buy, or the debt you can easily consolidate, by using the checks. However, what they don't tell you is that consumers are assessed an additional fee of 2% to 5% of the transaction just for using these checks.

"They are extremely costly to use, and they are a target for thieves. They can be used by anyone and can cause tremendous problems for your account," says Hardekopf. "There is nothing positive or useful about convenience checks. When you get convenience checks in the mail, shred them immediately."


2) Apply monthly payments to highest rate balances first. "If Congress was really serious about helping consumers, they would change the way credit card issuers apply monthly payments to the outstanding balance. Applying the monthly payment to the balance with the highest interest rates would save cardholders a lot of money on interest charges and help them get out of debt much faster," says Hardekopf.

Currently, the monthly payment is applied to the lowest rate balance first before paying off the balance with the highest interest rate. That means the balance will continue to accrue unpaid interest as long as you use the card to make purchases. This practice keeps you paying on your balance with the highest interest rate until the moment you pay off your total balance.

"Consumers need to understand that they are paying off the balance on their lowest rates first. This is one reason why it may seem like forever to bring down a credit card balance. This is just another way for credit card companies to maximize the amount they receive in interest payments," says Hardekopf.


3) Make the Terms and Conditions easy to understand. "We hope that Congress is able to encourage or force the industry into making the terms and conditions easier to understand. Many lesser-known fees are hidden deep in the fine print," says Hardekopf. For example, American Express charges a fee for the conversion of points into the Frequent Flyer program of a U.S. airline. The maximum fee is $50 and it is charged to the credit card account. Chase charges a $14.95 service fee for the use of travel agency services for mileage redemption.

Credit Card Issuers Make Changes Just Before Senate Hearings

Chase and Citigroup Make Changes Ahead of Senate Hearings

Just before Senate hearings begin to investigate their industry, Chase and Citigroup have recently announced credit card policy changes that actually help their customers. In January, Chase announced that it was ending its two-cycle billing policy. Last week Citi announced that it was ending its universal default policy and its "any time for any reason" rate increases.

"This is good news for their cardholders and an encouraging sign for consumers. Obviously, pressure from Congress has stirred this change of heart," says Bill Hardekopf, CEO of LowCards.com. "As soon as the Democrats took over, focus turned to the 'abusive' practices of the credit card industry. This is quite different from the blessing of the Republicans who passed a bankruptcy law that protected lenders and made it much more difficult for borrowers to declare bankruptcy."

Today, the Senate Permanent Subcommittee on Investigations holds its first of several hearings to examine practices of the credit cardindustry. They will consider how to protect consumers from lurking fees, sudden interest-rate spikes and other dangers in the fine print.

"The changes by Chase and Citi seem to be an attempt to say they can make the changes themselves, without legislation," says Hardekopf." CEOs from Chase and Citigroup are both testifying at today'shearing, so it will be nice for them to be able to point to the changes they have made on their own. However, I don't think the Senators on the subcommittee will think these changes are good enough."

Chase policy changes include:

Using an average daily balance method of calculating finance charges instead of the two-cycle method. This change will reduce the finance charges for consumers when they choose not to pay for a new purchase in full. Two-cycle billing increases the interest paid by those who occasionally carry a balance.

Providing free, convenient options to manage accounts through Chase Online. Chase is also encouraging customers to use its free alerts for reminders when a payment is due or when they have reached a designated credit limit.

It will no longer charge over-the-credit-limit fees for customers who have been in a "chronic overlimit position" for over 90 days.

Citigroup policy changes include:

Ending "universal default" on all Citi-branded consumer credit cards,effective immediately. Universal default is one of the most penalizing practices that automatically increases the rate to over 30% if you fail to make a payment on another bill, or if your rate goes up with another lender.

Eliminating its "any time for any reason" rate increases. This allowed the company to raise interest rates and change terms at any time and for any reason, another common practice among card issuers. The policy is effective immediately for new customers and will go into effect for current customers by April.

"This is a good start, and we are hopeful that other issuers will follow and eliminate some of their most penalizing practices. Concerned consumers can call their congressman or representative insupport of changes," says Hardekopf. "Cardholders of other issuers also need to be aware of what is going on so that they can use this to negotiate with their own credit card company."

LowCards.com ( http://www.lowcards.com/ ) is a website that helps consumers easily compare credit cards in a variety of categories suchas lowest rates, rewards/rebates, and lowest intro rates. It alsogives an unbiased ranking and review for each card. Created by Hampton & Associates, the company has been analyzing the creditcard industry and supplying objective websites on various consumer expenses for over six years.

Teenagers with Credit Cards: A Financial Lesson or a New Market for Credit Cards?

Is handing your child a prepaid credit card a good lesson in personal finances? Credit cards aimed at younger teenagers are being advertised as an opportunity for parents to monitor spending and to set spending limits, while giving teenagers flexibility and spending independence. Parents are encouraged to load money for allowances and chores onto the card; teenagers are then able to use the card just like a credit card and to spend up to the pre-set limit.

"I don't think the early use of credit cards is wise instruction for money management. Before we teach kids how to spend, we need to teach them how to save," says Bill Hardekopf, CEO of Lowcards.com. "They need to know how to designate a percentage of their money for spending, but more importantly, a larger percentage needs to be saved. They need to learn how to save money in their own bank, to watch it accumulate, and then take the cash to make a purchase."

"We value our money much more if we are actually spending cash and not just whipping out the credit card. We are much more careful with our purchases if we realize that the money is actually gone after we make the purchase. The pain and anxiety from an empty wallet is a very good money management lesson, using a credit card avoids that altogether."

The prepaid cards are aimed at teenagers as young as 13. They even encourage families to use their service to monitor chore completions and payments for children younger than 13.
"Parents don't need a credit card to help them monitor chores and to hand out allowances," says Hardekopf.

"Even though the marketing for these cards makes them sound harmless and even helpful, do we really need to be teaching our kids how to use credit cards this early? Credit cards issuers are smart; they realize this is a good way to get kids hooked on credit cards at a very early age and issuers are hoping that brand loyalty is established for a lifetime," says Hardekopf.

Of course there are fees for using these cards. PAYjr charges a $4.95 enrollment fee, a $2.95 monthly maintenance fee, and a $.50 load feeper each load. Payoneer charges a $9.95 activation fee, a $3.00 monthly fee and $1.35 ATM withdrawal fee, $5.00 for the first load and$2.00 for all other loads. Allowcards charges a $19.95 activation fee, a $3.50 monthly fee and a $3.95 shipping fee.

LowCards.com ( http://www.lowcards.com ) is a website that helpsconsumers easily compare credit cards in a variety of categories suchas lowest rates, rewards/rebates, and lowest intro rates. It also gives an unbiased ranking and review for each card. Created byHampton & Associates, the company has been analyzing the credit card industry and supplying objective websites on various consumer expenses for over seven years.