Taxes and Your Credit Score

With great privilege comes great responsibility. Having the freedom to earn and spend at your own discretion is sweet. With that, however, comes responsibility and accountability. As an adult, bills are at the top of the list of financial priorities. Owing money can be a burden. Owing taxes is a bill that may not come frequently, but when it does it can bring serious implications if it is not handled appropriately. Taxes are a bill that may not automatically affect your credit. However, the way you decide to pay unpaid taxes can impact your credit.

The following are just a few payment options and the impact they have on your credit.

Pay By Credit Card

If you happen to be an Amex card holder, or any other credit card with a buxom bottom line, charging a tax bill is naturally an option. Bear in mind, however, that these charges will not be without consequence of you are already carrying a sizeable balance on your card. Adding charges to a credit card that is already near it’s limit can hurt your credit utilization ratio. Credit utilization calculates the total amount of debt a consumer has on all revolving credit accounts (such as credit cards) and compares them to account limits. This measurement is important and makes up approximately 30% of a credit score.  

Pay By Personal Loan

Regardless of what you chose to spend the cash on, if you secure a personal loan, the loan amount and records of monthly payments will be noted on your credit reports. The loan application alone will count as an inquiry into your credit which will lower your score somewhat. But not to worry, this will only be a temporary dip.

If you are considering applying for a personal loan to cover a tax bill, first take the time to find out where your credit currently stands with a free credit report. Second, do your research and find out the minimum requirement are for the lenders you are considering (ie. minimum credit score, income requirements, ect.) in advance. Select a lender with requirements that comparatively match your credit score.

Pay By Installment Agreement

Since installment agreements are not reported to the credit reporting agencies, entering into an installment agreement with the IRS to pay a tax bill will not affect your credit.

What If I Can’t/Don’t Pay

If you truly feel that you cannot pay and that attempting or committing to do so would create a financial hardship for you and your family speak up. Contact your state and/or Federal tax commission to report the extenuating financial circumstances that you feel are making it impossible for you to pay. You may be surprised at how flexible these agencies are willing to be. Be prepared, however, to prove your eligibility and need for an exception.

Neglecting or failing to pay your tax bill could affect your credit, especially if your tax bill is $10,000 or more, the threshold when the IRS generally issues a tax lien against citizens. A tax lien is considered a serious negative item and could remain on your credit report for seven years after the tax liability is resolved, unless you take the proper steps to have it withdrawn. The IRS recently made some changes to it’s tax lien policies making it easier for taxpayers to get lien withdrawals after paying their tax bills. In most cases he IRS is willing to withdraw tax liens when a taxpayer enters into a Direct Debit Installment Agreement.

No matter your chosen strategy for resolving your tax debt, it is always a good idea to begin with your free credit reports and free credit scores to make sure there are no unexpected surprises.

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