Owing the IRS a big tax bill come April 15 doesn’t automatically affect your credit. But how you choose to pay your taxes does, and unpaid taxes may impact your credit as well.
Here are some ways that you can pay your tax bill and how they impact your credit.
Payment Option 1: A Personal Loan
If you apply for a personal loan to cover a larger-than-anticipated tax bill, the loan amount and your monthly payment record will be noted in your credit reports. And the loan application itself will count as an inquiry into your credit and this will lower your credit score a little bit, though the drop is temporary.
If you need to apply for a personal loan to cover a tax bill, begin by getting a free look at your credit strengths and weaknesses by ordering your 3 free Credit Reports from www.annualcreditreport.com. Minimize loan applications by finding out a lender’s minimum credit score requirements in advance. Choose a lender with credit requirements that match your credit score.
Payment Option 2: A Credit Card
Charging a big tax bill is certainly an option for consumers with credit cards with roomy credit lines. But there are consequences to your credit score if you’re already using a large amount of your available credit. Charging a credit card near its limit can hurt your credit utilization ratio. Your credit utilization takes the total amount of debt you have on all of your revolving credit accounts (i.e. credit cards) and compares it to your accounts’ limits. And this important measurement makes up about 30% of your credit score.
Payment Option 3: An Installment Agreement
Agreeing to pay a tax bill by an installment agreement with the IRS doesn’t affect your credit since installment agreements are not reported to the credit reporting agencies.
The Effect of Non-Payment: A Tax Lien
Failing or neglecting to pay your tax bill could affect your credit, especially if your tax bill is $10,000 or more, the threshold when the IRS generally issues a tax lien against citizens.
A tax lien is considered a serious negative item and could remain on your credit report for seven years after the tax liability is resolved, unless you take steps to have it withdrawn.
In 2011, the IRS made some changes to its tax lien policies making it easier for taxpayers to get lien withdrawals after paying their tax bills and in most cases withdrawing tax liens when a taxpayer enters into a Direct Debit Installment Agreement.