It's tempting to pay your state and federal tax bill by credit card. The tactic lets you delay actual payment for a month or so, and maybe earn a few hundred or thousand reward points in the bargain.
Here's what's wrong with that reasoning:
•If you file and pay your bill electronically, you'll owe more. The IRS authorizes just a few companies
to process electronic credit- and debit-card payments. They're permitted to charge processing fees of up to 2.49 percent of your balance. On a $2,000 tax bill, that's an extra $50. Why should anyone get more of your money, especially now?
•If it turns out you can't pay that credit-card bill on time and in full, you're subject to credit-card annual interest rates currently averaging 10.75 percent, according to Bankrate.com
. Folks with less-than stellar credit can pay an average of about 13 percent, says Cardtrak.com
•If you're paying by credit card because you're short of cash now, the government offers an option that can cost far less. The IRS automatically accepts requests for payment installment plans (also called payment agreements
) for up to $25,000 in combined taxes, penalties and interest. You'll pay interest as long as you owe, but the IRS's current interest rate--4 percent
for the second quarter of 2009--is far less than the average credit-card rate, and isn't likely to jump up sharply over time like a credit-card teaser rate. (If you choose the installment plan, you still have to file the return on time on April 15 to avoid penalties; you just don't have to pay everything then.)
•The average credit-card reward is 1 percent of purchases; on a $2,000, that's worth $20. If you're late on a payment, you'll likely wipe out that reward with penalties and late fees. Why bother?