Can Taxes Harm Your Credit?

Credit Reports
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3
 Min read
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March 3, 2021

If you end up owing money on your taxes, you may be worried about how this might affect your credit. Owing taxes doesn’t automatically mean your credit will be impacted, but decisions you make on how to handle your tax debt could end up affecting your credit score. 

Credit reports through TransUnion, Experian, and Equifax contain information on money you’ve borrowed and whether you’ve repaid credit on time. If you’ve had legal issues in the past such as bankruptcy, judgment, and/or a tax lien;this information is part of your credit report.

Using a Credit Card to Pay Taxes

It can be tempting to use a credit card to take care of your tax bill. Credit cards offer a convenient way of paying bills but keep in mind that if you’re unable to pay it back within 30 days, interest charges can add up in a hurry. 

Another thing to consider before reaching for your credit card is that adding to balances you already owe increases your credit utilization rate. If using a credit card to pay taxes pushes your utilization rate above 30 percent, it can affect your credit score. If your score goes down, for this reason, the best thing you can do is pay back what you owe as quickly as you can.

Should You Take Out a Personal Loan to Pay Taxes?

Another option for settling a tax bill is to take out a personal loan. One advantage of using this option is that your interest rate will probably be lower than what you’re paying on a credit card. 

Personal loans can also be easier to fit into your budget than credit cards. You’ll know exactly how much needs to be paid each month, and you’ll know when the final payment will be made. It’s a good idea to research terms and rates before deciding to take out a loan.

Repayment Programs Through the IRS

The IRS has tax relief options available to help consumers repay their taxes. These repayment programs allow you to break your debt down into payments, or you may be able to negotiate a settlement. 

Tax relief plans can be helpful if you don’t have the money to pay what you owe in taxes, but you may have to pay a setup fee along with interest and penalties until you’re able to finish repaying what you owe. If this seems like the best choice for your situation, the good news is that payment plans through the IRS aren’t considered loans and won’t have any impact on your credit.

Protecting Your Credit

Whatever you do, don’t ignore debt to the IRS. At Dovly, we want to help you understand what goes into your credit report and credit score and help you learn how to improve your financial picture. Dovly can help you make smart decisions about tax debt and possible credit repair solutions. Get in touch with Dovly today and find out how we can help you have a better financial future.


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