Using a credit card to pay taxes

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Using a credit card to pay taxes

We can all agree that there are many times in life when having some available credit can come in handy. Certainly, if you find yourself in a tough spot around tax time, a credit card can be your saving grace. However, the question remains, should you use your credit card to pay taxes?

Luckily, there are a few places you can turn to when you can’t pay your tax bill. Some of the most popular options are:

  • Applying for an installment agreement with the IRS

  • Borrowing money from your home

  • Applying for a loan

  • Using a credit card

Credit cards do get a bad rap. Credit card companies can charge you high-interest rates, and that can create a giant mess of debt that is almost impossible to escape.

Credit cards can also offer a few perks, if you will. If used effectively, a credit card can provide you with rewards, cash back and travel points that are worth a sizable sum of money. It can even help to build your credit score, as oddly as that may sound.

If you were going to use your credit card to pay your tax bill, it would only make sense that you use it wisely. We've put together three strategies to help you figure out whether you should use your credit card to pay for your taxes.

Start with the end in mind

So, you know you're going to have to bite the bullet and use a credit card to pay your taxes, but which card should you use? Sure, they all look the same in your wallet; however choosing the right card for your tax bill is one smart money move you should take the time to ponder.

Always go with zero - If you're lucky enough to get a zero percent balance transfer or zero percent purchase offer in the mail, then you've hit the credit card lottery. These types of credit card offers are usually only reserved for the credit score lucky - those that have scores north of 720. If you’re debating between an installment agreement with the IRS and a zero percent purchase offer from your credit card, you can save yourself in interest by choosing your credit card and paying down the debt before the interest rate rises.

If not zero, score some points - If you don't have a stellar credit score and can't enjoy a zero percent offer, then you'll want to make sure you choose the card with the lowest interest rate that offers you some bang for your buck. Whether it is cash back, rewards points or free plane travel, using your credit card to pay for your tax bill should offer you some perk that's worth real money in your pocket.

Wait, I can negotiate?

Did you know that you could negotiate your credit card interest rate? It's true, and it’s easier than you think. According to a survey of 981 credit card holders by CreditCards.com, 78%, or more than three out of four, were successful when asking for a lower credit card interest rate.

"People have way more negotiating power with their credit card issuer than they think they do," said Matt Schulz, CreditCards.com’s senior industry analyst. "The worst that can happen is they say no, but most of the time, they say yes. The credit card market is incredibly competitive right now, and consumers should use that to their advantage."

Here are a few tips to keep in mind when asking for your interest rate reduction:

  • As with anything, the better your credit score is, and the longer your history with the credit card company, the better the odds at succeeding when you ask for an interest rate reduction.

  • It never hurts to be ultra polite on the phone when you make your request, aka, kill them with kindness.

  • You’ll want to be reasonable with the interest rate reduction request you are making. Somewhere in the ballpark of a 3-5% interest rate reduction can be considered fair.

  • Having some healthy competition never hurt anyone. If you've received an offer in the mail for a new card with a lower interest rate, use that as leverage with your current credit card company. Chances are they won't ask you to fork over the evidence of lower offers, but it's good to have in case they call your bluff.

  • If you get denied, accept defeat without a fight, and then try again in a few days. Chances are you might get someone else on the phone that is more willing to consider your request. However, don't call every day if you get more than three nos. If that's the case, wait a good 3-6 months before you call back asking for an interest rate deduction on that card.

Be alternative

If all else fails and you can't get a credit card offer with a lower interest rate, or your current card is unwilling to consider an interest rate reduction, then it's time to think outside of the box.

The last few years have seen a surge in alternative lending companies that are offering competitive interest rates and all sorts of different perks to help consumers pay off and pay down credit card debt. Some of the popular companies include:

Payoff, for example, positions themselves as a company dedicated to helping consumers get out of debt entirely. They are committed to teaching each customer good financial habits to stop the continuous debt drainpipe that many find themselves in. You can easily apply for a loan online and find out within minutes if you are approved. Once you receive the cash, you can use this money to pay off the credit card that you used to charge your tax bill.

Why would this make sense?

At the end of the day, the object of any debt is to pay as little in interest and fees as possible over the life of the loan. With an alternative loan from any of these companies, you can secure a fixed rate loan, often at a much lower interest rate than your traditional credit card would offer, and guarantee that your payment will remain the same each month. If you get a salary bonus at work, great, just use those funds to help pay down this debt even faster.

A credit card can be a smart financial tool if you find yourself in a pinch at tax time. As with any money move you make, it takes a bit of a strategy to make sure your credit card is working for you and not against you. Take some time, turn on some relaxing music and figure out which credit card scenario will work best for your financial situation. After all, tax time is stressful enough, no need to make it even worse.

Photo: musicwala