Credit Cards and Taxes—5 Tips for the Tax Season
Taxes are one of the few things one can count on in life, but many Americans find them fairly unpleasant.
As you prepare for the upcoming tax season, you will want to keep a few tips in mind considering your credit cards and taxes.
Tip 1: Don’t forget to claim your interest
While you cannot write off your credit card interest on personal purchases, you can write off the interest on any business purchases. This is one of the reasons it is so important to have a credit card specifically for your business. You will easily be able to identify the amount of interest you paid on company expenses.
Tip 2: Don’t pay your taxes with your credit card
If you do end up owing this year, do not use your credit card to pay your taxes, unless you have a card with a 0% APR on purchases and can pay the entire balance before the introductory interest rate ends. If you are unable to pay off the charged amount during this introductory period, you will start to incur the steep interest charges that come with any credit card. The average credit card interest rate is 16.99% and can be as high as 29.99%. So carrying a balance on your card due to your taxes can be a very costly endeavor.
If you do pay your taxes with a credit card, you will have to pay an additional fee of 1.87% to 1.99% of the charged amount to use the card.
Tip 3: Use your refund to get a secured credit card
If you have bad credit or no credit and you are going to receive a tax refund this year, consider putting the funds on a secured credit card. These cards work just like an unsecured credit card. You can use them to make purchases in stores and online, and you will need to pay at least the minimum payment on time each month. However, you set your credit limit by depositing a certain amount of funds on the card. If you use a secured credit card responsibly for six months to a year, your score will increase, and you will qualify for better terms on future loans and credit cards.
Tip 4: Use your money to pay off credit card debt
Another option for your tax refund is to use the money to pay off (or at least pay down) any existing credit card debt. As mentioned earlier, credit cards can carry a high interest rate, and the sooner you can pay the cards off, the more money you will save in the long-term.
Paying down your debt is especially important if you are currently using 30% or more of your available credit. The second most important factor in determining your credit score is your credit utilization. If you are using more than 30% of your available credit, your score will suffer.
If you are carrying balances on multiple cards, start by paying down the debt on the card with the highest interest rate.
Tip 5: Use tax time to evaluate your finances
Finally, since you are already examining your financial situation, tax time can be a great opportunity to check your credit report and create a budget.
Everyone is entitled to a free copy of their credit report each year from each of the three main credit bureaus. Once you request it, evaluate each entry to make sure it is correct. If you do find incorrect information, you can request that the credit bureau fix the error, which could improve your credit.
Additionally, even if you already have a budget, spend a month tracking your income and expenses. Is there anywhere you can cut back so you can save more or get out of debt? If so, make the necessary changes and enjoy more stable finances.