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Daily Q&A: What are the pros and cons of using a credit card to pay my income taxes?

I'm going to owe money on my tax bill. Does paying my taxes with a credit card make sense?

Paying taxes with a credit card is expensive.

Bill Hardekopf, chief executive officer at LowCards.com, says the Internal Revenue Service and credit card issuers promote the benefits of paying taxes with credit card. They note the ease of payment, which can be done over the phone or online, and it delays "the pain of payment for another month," Hardekopf says.

But it is costly.

There are third party fees associated with paying taxes with a credit card. Hardekopf says most third-party providers charge a 2.45 percent fee for processing your credit card payment.

And if you don't pay off the unpaid balance, you face interest charges on your credit card.

Here's what Hardekopf suggests:

• If you cannot afford to pay your taxes right now, there are less expensive options than a credit card loan. An installment plan with the IRS is one possibility; the interest rate is currently 4 percent for underpayments. Another option is a personal loan with a bank or credit union. You may receive a lower interest rate, and that rate will likely be fixed, unlike the IRS interest rate and a credit card's interest rate, both of which may change.

• Verify that the tax payment will be treated as a purchase and not a cash advance. Cash advances come with a high interest rate and typically a 3 percent cash advance fee.

• Be careful how you provide your credit card number. The IRS warns filers not to write the credit card number on the return and not to mail in the credit card.

For more information, visit: www.LowCards.com.

Question for the Consumer's Edge? Send it to ipenn@sptimes.com or twitter.com/consumers_edge. Questions are answered only in this daily feature.

Daily Q&A: What are the pros and cons of using a credit card to pay my income taxes? 03/24/10 [Last modified: Wednesday, March 24, 2010 11:00am]
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