You know that it’s important to pay your bills on time every month in order to help improve your credit score and maintain the good credit you’ve worked so hard to build. When it comes to taxes, however, if you find yourself faced with a large tax bill, it can be overwhelming to think about how you’ll pay it. In today’s post, we’ll look at how an unpaid tax bill can impact your credit score, as well as some options to help you deal with it.
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How Taxes Affect Credit Scores
The good news is that unpaid taxes no longer have a direct impact on your credit scores. Prior to April of 2018, tax liens were frequently included on credit reports with all three credit reporting agencies. Now that tax liens don’t show up on credit reports, they no longer have a direct impact on your scores, but unpaid taxes can still create numerous problems. With that in mind, it’s important to consider how you will pay your taxes, since this decision could potentially impact your credit score in a negative manner.
While it might be tempting to consider just not paying your taxes, this would be a big mistake. There are serious consequences for not paying taxes. Similar to other bills, taxes have a due date — April 15. If you owe money to the federal government and don’t pay it by the deadline, you could be charged a penalty. Additionally, the IRS typically adds interest on top of unpaid taxes and penalty fees. The mounting bill you owe the government will likely impact your ability to continue paying your other bills on time, which will begin to have serious repercussions on your credit score.
Tips for Protecting Your Credit From Taxes
As stressful as it might be to consider all the ways that unpaid taxes can impact your credit scores, it’s important to know that there are ways of paying what you owe to the government without neglecting your other bills. Keep taxes from derailing your credit by looking into these options:
1. Installment Agreement
Though it is intimidating to think about asking the IRS (internal revenue service) to work with you, the truth is that they understand consumer hardships and offer debt settlement and tax relief options. The good news is that they offer the option to pay your taxes in installments, which will not affect your credit, since the IRS does not report installment agreements to the credit reporting agencies.
2. Credit Cards
Depending on how much you owe the IRS and the limit on your credit card, you might be able to pay your tax bill by charging it to a credit card. While this is an option, you want to consider your ability to pay your credit card bill on time. Additionally, if you’re already using a large amount of your available credit, then adding an additional charge that puts your credit near its limit will likely hurt your credit utilization ratio. As you should know, late payments will also further damage your credit score. If you’re looking to build your credit history, then charging your tax bill to a credit card and making on-time payments, however, could be a good option.
3. Personal Loans
When faced with a tax bill that is much larger than you anticipated, a personal loan could be another good option. Remember that the loan amount and your monthly payment record will be included on your credit reports. The loan application does count as a hard inquiry into your credit, which will cause a slight, but temporary, drop in your credit score.
Boost Your Credit Report
When it comes to taxes, it’s tempting to ignore them, but remember that unpaid taxes will have serious consequences for your credit report. Consider one of the three options we covered as a means of paying off your debt. If you need more in-depth assistance with improving your credit score, then contact 360 Credit Consulting to get started with a free consultation.