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Paying Taxes With Your Credit Card Can Get Expensive

April 13, 2006

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More and more Americans are paying their tax bill with their credit cards. Some card issuers are even offering incentives for paying the bill using their card.

Though the convenience and added perks may sound like a great deal, the Association of Independent Consumer Credit Counseling Agencies (AICCCA) suggests consumers take a second look before charging their taxes.

"Consumers would be wise to consider all payment options and avoid charging their tax bills if other payment arrangements are available," said AICCCA President David Jones. "With some 50 percent of credit card users revolving a balance monthly, adding to those balances is not a good idea."

AICCCA advises consumers consider the following before charging their tax bills:

• You will pay more than the amount owed the IRS. The convenience of charging your tax obligation comes with a 2.49 percent fee assessed by the third-party company that processes the transaction. If your tax liability were $3,000, your total charge would be $3,074.70.

• A reward from your card issuer may not be cost effective. For those consumers that want to cash in on double air miles or other incentives, check the math and determine if the reward outweighs the processing fee to use your credit card.

• Revolving the tax charge on your credit card will increase your total tax bill. Consumers who will be charging to a credit card account would be wise to determine how long it will take to pay off the charge. Interest charges add up quickly and your tax bill could end up costing you much more than the original amount if the balance will not be paid within 90 days or so. A $3,000 balance at the average annual interest rate of 13 percent is up to an additional $32.50 per month in interest charges.

• Adding tax bill to a credit card with an existing balance could spell disaster. With the universal default clause that is buried in the fine print of many consumers' credit card agreements, a missed payment on any account could mean an automatic increase in annual interest rate charges to 30 percent or more. The last thing you want to do is pay a 30 percent surcharge on your tax liability until the entire balance of your card is paid off.

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