Paying Off Your Credit Card Balance vs. Paying Your Taxes
August 17, 2007
I had a reader ask an interesting question the other day. If I am short on cash, should I pay off my credit card balance or pay my taxes?
Obviously if you don’t pay your taxes or credit card bill at all there are legal issues involved but this person is trying to decide which to put off and which to pay first. The options they’re considering are:
- Making the minimum payment on their credit card and paying their taxes in full.
- Paying off their credit card bill and paying their taxes late.
Since I’m not very familiar with the implications of paying your taxes late or what options you have to work with the IRS on making payments I thought I’d open this one up to the readers.
The goal is to minimize the amount of interest and penalties you pay to both the credit card company and the IRS. Assume you have a similar amount due to both the credit card company and the tax man. Which option would you choose and why?
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No matter what, pay the Feds. They can make your life miserable if you don’t. Credit card companies are annoying, but the government is much worse. They can take just about anything they want, and the interest rates they’ll charge will rival your credit card. I would consider getting a 0% balance transfer to reduce the amount of interest you pay on your credit card, but by all means, pay the Feds.
Jeremy & Financial Blogger, I always think about that scene in “The Pursuit of Happyness” where Chris Gardner is finally getting back on his feet and the IRS takes all the money in his bank account. It seems no matter what the situation, they’ll find you and take whatever they can.
Interesting idea Eric. I just pulled some of those Chase checks from my “to shred” pile to look at the terms. They came in March of 2007 and offer a promotional rate of 1.99% until December 2007 or a rate of 6.99% until the balance is paid off.
That does give you a while to round up the money while paying a lower rate than either the government or your credit card charges. Of course there is a transaction fee of 3% (maximum $99) of each check.
Pay off your credit cards – then pay off the IRS with the low interest checks the credit card companies are more than likely to send you in a matter of weeks.
Pay your minimum requested on your credit card first. If you are not doing so, a late payment will be recorded into your credit bureau. This will have immediate negative impact on your credit history. Keep in mind that a late payment is shown over 10 years in your credit bureau. If you have several late payments (no matter what is the amount and even if you are only 1 months late but over several occasions), this will affect your capacity of borrowing.
Then, turn around and pay Uncle Sam right away! If you are short after paying your credit card minimum payment, contact them to make an arrangement as Jeremy suggested. When you owe taxes to the Government, they have basically all rights against you (they design the laws after all!).
Pay your taxes!!
When it comes to collecting debt, uncle sam is at the top of the food chain. If you can afford to pay your taxes in full and still keep up with minimum payments on the cards, that is a no-brainer.
If you are in a situation where if you paid your taxes, you couldn’t make any payments on credit cards or vice versa, then the first thing you need to do is talk to the IRS to get another option in place. They offer installment plans at the very least, which may cost some interest, but far better than just being outright late.
The last thing you want to do is put off paying your taxes, then as time goes by something comes up and makes it impossible or difficult to still pay them, and then another year goes by and you possibly owe more taxes… That is how people get into serious trouble with the IRS. Dealing with a credit card company is like a walk in the park compared to the government.