Paying Taxes by Credit Card: Typically a Bad Move
Tax time is here and credit card issuers are using tax payments as an opportunity to appeal to new customers as well as increase usage among their current cardholders.
For the past few years, taxpayers have been able to pay for taxes with a credit card but convenience was the only benefit. The IRS uses third-party service providers to
process these credit card payments. They typically charge a 2.49% fee, which makes paying your taxes by credit card a poor financial move. However, this year some issuers are providing a cashback offer that makes it attractive for
cardholders.
"The best offer we have found is the Citi CashReturns card. It currently offers 5% cash back for three months and there is no limit to the cash you can earn," says Bill Hardekopf, CEO of LowCards.com. "This is the one time where paying your taxes with your credit card is a good idea because you will make an extra 2.63% on the amount that you owe." Using the Citi CashReturns card on a tax bill of $10,000, you will be assessed a fee of $249. But you will receive a 5% cash rebate on this $10,249 or $512.45. After the $249 credit card fee, you will make $263.45.
"American Express also advertises that you can earn up to 5% cash back by using the Blue Cash card. However, this is based on tiered rewards and the 5% only applies after you have made over $6,500 in eligible purchases this year," says Hardekopf. "Consumers need to be careful because these offers sound so good, but you must read the Terms and Conditions of the card to see the entire offer. There is no
tier on the Citi card; the 5% cash back offer begins right away. That's what makes this card so attractive for paying your taxes."
Most reward cards offer the standard one point per $1 spent on taxes. In most cases, this is not worth the 2.49% fee you will be charged using a credit card. It certainly is not worth the interest you will pay.
"In 2006, almost two million households used a credit card to pay taxes, a 36% increase over 2005. We expect that number to increase this year. For a household in financial trouble, it may seem like a relief to simply pay your taxes with a credit card, take care of the IRS and then forget about it as the taxes are rolled in to your balance," says Hardekopf. "Unfortunately, the fees and interest make this a
very bad financial decision." Most third party service providers charge a service fee of 2.49% for credit card payment. If your tax bill is $5,000, you will pay $124.50 in fees. However, if you only pay your minimum balance each month, the cost will be much more. If your APR is 15% and you just pay the minimum payment every
month, you will pay an additional $4,757.98 in interest and it will take 257 months (21 years) to pay off your taxes.
For the past few years, taxpayers have been able to pay for taxes with a credit card but convenience was the only benefit. The IRS uses third-party service providers to
process these credit card payments. They typically charge a 2.49% fee, which makes paying your taxes by credit card a poor financial move. However, this year some issuers are providing a cashback offer that makes it attractive for
cardholders.
"The best offer we have found is the Citi CashReturns card. It currently offers 5% cash back for three months and there is no limit to the cash you can earn," says Bill Hardekopf, CEO of LowCards.com. "This is the one time where paying your taxes with your credit card is a good idea because you will make an extra 2.63% on the amount that you owe." Using the Citi CashReturns card on a tax bill of $10,000, you will be assessed a fee of $249. But you will receive a 5% cash rebate on this $10,249 or $512.45. After the $249 credit card fee, you will make $263.45.
"American Express also advertises that you can earn up to 5% cash back by using the Blue Cash card. However, this is based on tiered rewards and the 5% only applies after you have made over $6,500 in eligible purchases this year," says Hardekopf. "Consumers need to be careful because these offers sound so good, but you must read the Terms and Conditions of the card to see the entire offer. There is no
tier on the Citi card; the 5% cash back offer begins right away. That's what makes this card so attractive for paying your taxes."
Most reward cards offer the standard one point per $1 spent on taxes. In most cases, this is not worth the 2.49% fee you will be charged using a credit card. It certainly is not worth the interest you will pay.
"In 2006, almost two million households used a credit card to pay taxes, a 36% increase over 2005. We expect that number to increase this year. For a household in financial trouble, it may seem like a relief to simply pay your taxes with a credit card, take care of the IRS and then forget about it as the taxes are rolled in to your balance," says Hardekopf. "Unfortunately, the fees and interest make this a
very bad financial decision." Most third party service providers charge a service fee of 2.49% for credit card payment. If your tax bill is $5,000, you will pay $124.50 in fees. However, if you only pay your minimum balance each month, the cost will be much more. If your APR is 15% and you just pay the minimum payment every
month, you will pay an additional $4,757.98 in interest and it will take 257 months (21 years) to pay off your taxes.
Posted by Lynn at
2:43 PM
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