Tax Debt Relief: Why Credit Cards Aren't the Best Solution

If you can't pay your tax bill in full, don't assume a credit card is your go-to solution.

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Key points

• If you underpaid your taxes in 2021, you may have a bill on your hands.
• It pays to look at an installment agreement before charging your tax bill on a credit card and paying it off over time.

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Many people who file taxes wind up being due a refund. But if you're in the opposite boat, you may now have a problem on your hands.

Tax bills can catch filers off guard. If you don't have enough money in your savings account to cover your IRS obligation by the April 18 payment deadline, you may need to get creative in paying that bill.

In fact, you may be inclined to reach for a credit card and use it to pay your tax bill. That way, you simply settle your debt with the IRS on the spot and then pay off your credit card over time, like you would for any other purchase. But while that might seem like a good route to take, here's why it's not ideal.

A credit card might cost you more

The IRS will allow you to charge your tax bill on a credit card. But if you go this route, that tax bill could end up costing you more.

For one thing, any time you carry a balance forward on your credit cards, you accrue interest on the sum you owe. If it takes you a year to pay off your tax bill, you could end up spending quite a bit extra.

Furthermore, too high a credit card balance could cause your credit score to drop. A decline in your credit score won't cost you money directly -- it's not like someone will charge you when your score goes from a 700 to a 680. But what may happen is it'll cost you more money the next time you need to borrow via a higher interest rate. And that's not an ideal scenario either.

Another thing you should know is that you'll be charged a fee to pay your tax bill with a credit card. That fee will generally be over 2%, which may be more than the amount of cash back your credit card gives you for transactions. If you're thinking you'll come out ahead financially by charging your tax bill on a credit card, that may not happen unless you have a credit card with a really generous rewards program.

A better alternative

If you can't pay your tax bill in full by the April 18 deadline, you can reach out to the IRS and ask to get on a payment plan. If you're able to pay off your bill over the course of a few months, you may not even have to pay a fee to get on one of these plans. For a longer-term repayment plan, you will generally be looking at a setup fee, but it could amount to much less than what you pay to use a credit card.

Owing the IRS money is never fun, which is why it pays to get your taxes done as early as possible. That way, if you have an underpayment to deal with, you'll have more time to come up with a way to scrounge up that cash in time. But if that's not possible, know the IRS will work with you to pay off your taxes -- and you don't need to resort to a credit card to tackle that bill.