Today, you can cover your rent, mortgage payments or college education with a credit card -- but should you use plastic to pay the IRS on April 15?
There are two different reasons to pay your taxes with a credit card. First, you want to "make money" on your e-filing by using a card with a high cash back offer or reward points. Or second, you can't pay your taxes in full, so you'd like to spread your payments out over a longer period at zero percent interest.
These two tricks carry more risk than paying via direct deposit or a check. In fact, I would only consider these strategies if you have a strong credit rating and meticulous record of paying your credit card bills on time. Otherwise, paying with plastic will produce more problems than dividends.
Here's to how navigate the choice, choose the right cards and gain an edge this tax season:
Go for Points, Not Cash Back
According to the IRS, there are six payment processors that can accept your credit card on behalf of Uncle Sam, and their fees range from 1.87 percent to 2.35 percent. Naturally, you would choose a 1.87 percent option, but will it pay off?
Let's say you owe the IRS $10,000. For general purchases, the highest cash back rate you can get is two percent from the Fidelity Investments Rewards American Express card. If you swipe $10,000 on the card, accrue the $187 in processing fee and get $200 back, you're up $13.
In my opinion, you're much better off using a rewards card with a bonus spending incentive. For instance, the Chase Sapphire Preferred Card offers 40,000 bonus points if you spend $3,000 within the first three months of opening the card.
So, $10,000 in taxes would provide a total of 50,000 rewards points. Right now, a round trip flight from New York to San Francisco (May 15 to 22) costs $412 dollars on United Airlines, or 32,960 points. Subtract $187 from $412, and you're up $225 plus your remaining points.
You could even sign up for two travel rewards cards and split your tax payment to double up. The United Mileage Plus Explorer Card pays 30,000 miles if you spend $1,000 in the first three months. You would have 40,000 points from the Sapphire Preferred, 30,000 miles from United and 10,000 additional points between the two cards. You're a few purchases shy of a flight from New York to London for 80,760 points -- a value of $1009.50. An international flight on the IRS beats the pulp out of $13. And one little kicker: You can write off the credit card processing fee on next year's tax return.
Spread Your Payments Out with a Zero Percent APR Card
Now, what if actually paying your taxes is much more of concern than getting a flight to London? The IRS offers an installment plan, but they set a quarterly interest rate at three percentage points over the federal short-term rate, which is currently at 0.28 percent. You'll pay $120 to set up a standard agreement, $52 for direct debit agreement or $43 if your income is below a certain level. In order to avoid penalties, you'll also have to make a minimum monthly payment.
Instead, you can sign up for a credit card that offers zero percent interest for at least one year and avoid paying interest as long as you pay off your balance fast enough. Credit cards only offer zero percent interest for an introductory period. For instance, the Citi Simplicity Visa Card provides a zero percent APR for the first 18 months. The Chase Freedom and Blue Sky from American Express both offer a zero percent APR for 15 months.
If you pay on time and clear your balance before the introductory rate ends, you will avoid paying any interest on your taxes.
Before You Swipe...
Remember, if you use a credit card, you always run the risk of missing payments, accruing interest and damaging your credit rating.
Read the fine print -- some credit card providers can drop the promotional zero percent APR if you miss a payment. If that's the case, make sure you use auto payments and maintain a cushy balance in your checking account.
Also, pay attention to your credit card utilization rate. If you have a $10,000 line of credit distributed across your cards and use $9,000, you hit a 90 percent utilization rate, which will hurt your credit score. If you miss your IRS installment payments, you get into legal trouble but not credit trouble.
If you struggle to pay off your credit cards in a timely manner, swiping for taxes probably isn't for you. However, if you want a free flight to London or a breather from IRS interest rates, consider using a credit card and choose it carefully.
