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Your taxes won't directly affect your credit scores one way or the other. Paying your taxes on time won't help your credit, and missing payments won't directly hurt your credit scores. However, missing payments could lead to extra penalties and interest on the unpaid amount, and some of the actions that the IRS takes to collect unpaid taxes could affect your ability to qualify for a new loan.
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How Paying Your Taxes Affects Your Credit Score
If you borrow money to pay your taxes, either by using a credit card or taking out a loan, your success or failure in repaying that account could directly impact your credit scores. Borrowing to cover your tax expenses can sometimes be a good option, but the IRS also offers payment plans that might cost you less in interest and fees—and won't risk harm to your credit.
When You Pay Taxes With a Credit Card
The IRS authorizes three third-party payment processors to collect tax payments with debit and credit cards. The companies charge a processing fee that's a percentage of your payment amount if you use a credit card.
- Using a credit card to pay a tax bill only makes sense in certain cases. Paying with a credit card might be beneficial if your card has an introductory 0% annual percentage rate (APR) offer that allows you to pay off the balance without accruing interest. Additionally, some people make tax payments to meet the spending requirements for a new credit card's intro bonus. But be aware of how a credit card could affect your credit.
- Opening a new card may hurt your credit. If you opened a new credit card to pay your taxes, the application could lead to a hard inquiry that could temporarily ding your scores slightly. A new credit account also lowers the average age of your credit accounts, which can hurt your scores.
- High balances can lower credit scores. If you don't immediately pay off the credit card's balance, the tax payment could increase the card's credit utilization ratio. This measures the amount of credit you're using relative to the card's available credit, and a higher utilization ratio is worse for your credit scores.
- On-time payments may help your scores. Making at least the minimum monthly credit card payments on time can help your credit scores. Paying more than the minimum also might increase your score with the newer credit scoring models that consider trends in your credit history.
Credit scores aside, balances without promotional interest rates may accrue interest based on the card's standard APR. Credit cards often have a much higher interest rate than payment plans the IRS offers.
When You Pay Taxes With a Personal Loan
Another option may be to apply for a personal loan and use the money to pay the IRS.
- Personal loans have lower interest, but potentially hefty fees. A personal loan might offer a lower interest rate and higher loan amount than you can qualify for with a credit card. However, some loans have origination fees, and the loan will start to accrue interest immediately.
- New loans can hurt your credit scores. As with credit cards, applying for and taking out a new loan can lead to a hard inquiry and lower the average age of account in your credit report. Although credit utilization ratios only consider revolving accounts, chiefly credit cards, the amount you still owe on loans can affect your credit scores. With a new loan, you have the entire loan balance—or close to it—left to pay.
- Repaying the loan could help your scores. Your on-time loan payments and paying down the balance can help your credit scores over time.
If you're considering taking out a new loan to pay your taxes, try to gather several personal loan offers to see which lender gives you the lowest fees and interest rates. Experian can show you personal loans matched to your credit profile with soft credit inquiries that don't impact your credit scores.
When You Pay Taxes With IRS Payment Plans
If you want to pay off your tax bill over time, consider one of the IRS's payment plans.
- Two plans are available. The short-term plan allows you to pay off the balance in under 180 days if you owe less than $100,000 overall. If you owe less than $50,000, you might qualify for a long-term plan that allows you to make monthly payments over more than 180 days.
- No or low fees and interest. The IRS doesn't charge any fees for short-term plans and $31 to $130 for long-term plans, depending on how you apply and agree to make payments. Fee waivers may also be available on long-term plans. The interest rate can change quarterly, but it may be similar or lower than what someone with excellent credit could receive with a personal loan.
- Doesn't require a credit history or affect your credit. The IRS' payment plans don't require a credit check, have any credit requirements and the plan won't be reported to the credit bureaus.
You can apply for a payment plan online, by phone, by mail or in person.
What Happens to Your Credit When You Don't Pay Taxes?
Not paying your taxes won't affect your credit scores directly because the IRS doesn't report tax debt or tax payment status to the credit bureaus. Even if the IRS assigns your debt to a private collection agency, the agency isn't allowed to report the collections account to the credit bureaus.
However, missing tax payments can have severe repercussions that indirectly affect your credit:
- Penalties and interest can add up. The IRS may charge you penalties and interest on your unpaid taxes, increasing how much you owe overall.
- Tax levies may decrease your available funds and increase your DTI. The IRS may levy your bank account and withdraw money to pay off your tax debt. It can also use ongoing levies to take money from your paychecks, retirement income or Social Security benefits. These could affect your ability to pay other bills and may increase your debt-to-income ratio (DTI), which might make qualifying for new credit accounts more difficult.
- Tax liens could make selling property and getting a loan more difficult. The IRS can also attach a tax lien to your personal and business assets, such as a home or vehicle. The lien gives the IRS a claim on the asset, which might make it difficult to sell the asset or refinance a loan that uses the asset as collateral. You also might have trouble qualifying for certain types of new loans if you have unresolved tax liens.
Even if you can't afford the full payment, filing your tax return on time could be beneficial. If you file late, there could be additional penalties, interest and consequences.
If you're not ready to file by the standard deadline, you can file for an automatic and free tax extension online. The extension gives you more time to complete and file your return, but it doesn't extend your deadline for paying what you owe.
Compare Your Options Before You Borrow Money
Paying your taxes usually won't affect your credit scores one way or the other, and the IRS' payment plans may be the best option if you can't afford your tax bill by the filing deadline. But if you think a credit card or loan makes sense, your credit scores can affect your offers and the new accounts can affect your credit.
You can check your credit scores to see if you'll likely qualify for a credit card with a 0% intro APR offer, or a loan with a low interest rate. Experian members can also get matched with credit card and personal loan offers based on their credit profile.