It’s a good thing to be punctual, especially when it comes to financial matters. Credit scores rely heavily on your payment history, so developing a habit of making on-time payments will help you improve and maintain high credit scores.
While tax information isn’t generally reported to credit bureaus, missing the deadline for paying the IRS could result in a tax lien, which could seriously damage your credit. But in general, that’s the only way tax-related information goes on your credit report.
What’s a Tax Lien?
It’s pretty simple: If you don’t pay your taxes, the IRS can file a notice of federal tax lien with the credit bureaus, and that’s a huge negative on your credit reports. If you owe more than $10,000, the IRS automatically files the lien after taxes have gone unpaid for 30 days (the threshold increased from $5,000 to $10,000 in 2011). At that point, you could see a possible 100-point slide in your credit scores.
“All is not lost if that happens to you,” said Gerri Detweiler, director of consumer education for Credit.com. “You need to look into the Fresh Start program to get into an installment agreement.”
She’s referencing a payment plan that allows the IRS to automatically debit a taxpayer’s bank account each month until the taxes have been paid. If an eligible taxpayer has enrolled in the installment plan, he or she can request the lien be withdrawn.
Unlike other debts, the IRS installment plan payments will not be reported to the credit bureaus, so that aspect of the lien will not impact your credit.
Other Credit Consequences
There are other ways taxes could hurt your credit, which is why you should carefully consider your payment options. Failing to pay your taxes on time may not always hurt your credit, but it could contribute to credit problems.
First of all, missing the April 15 deadline may subject you to late-payment penalties, which the IRS outlines on its website. You’ll end up having to pay more, and the effect of added expenses could put a wrinkle in your ability to meet other debt obligations.
If you decide to pay your taxes with a credit card or personal loan, there’s the potential you could see some negative impact on your scores. Adding to your debt load can affect your credit scores as it raises your credit utilization, and if you end up struggling to repay the loan, a poor payment history will have a similarly negative effect.
When considering how to pay your taxes, give your credit scores a look. You can see two scores for free using Credit.com’s Credit Report Card, and the information may help you determine whether you can afford to temporarily add to your debt load or if you can qualify for a personal loan.
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