Can Paying My Taxes Affect My Credit Score?

credit score taxes

Tax time is a stressful time. Do you worry that tax issues will spill over to your credit reports and affect your credit score? The good news is that owing the IRS doesn’t affect your credit score, but how you choose to pay your taxes does.

 
The following are 4 ways that you can pay your tax bill and the implications to your credit score:

 

Personal Loan

If you apply for a loan to settle a large tax bill, the personal loan amount and your monthly payment record will be reflected in your credit reports. Note that the fact that you applied for a loan will count as an inquiry into your credit score and this will lower your credit score as well, but the drop is merely temporary. If you are considering applying for a personal loan, you should begin by assessing your credit strengths and weaknesses. You can minimize loan applications by first determining a lender’s minimum credit score requirements. Choose a lender with credit requirements that will match your credit score.

 

Credit CardCredit-cards

Having a large credit line is an advantage for most people. Charging a tax bill can be an option for credit card holders. If you’re already consuming a large amount of your available credit, there will be consequences to your credit score. Charging a credit that is nearing its limit can impact your credit utilization ratio. This measures about 30% of your overall credit score.

 

Installments

Paying a tax bill by IRS installment agreements will not affect your credit score in any way. This is because installment agreements are not reported to credit reporting agencies.

 

Tax Lien

If you owe a large amount of taxes or if you fail to resolve your debt quickly, the IRS will issue you a tax lien which will reflect on your credit reports.  Tax liens fall into the negative category, alongside collection accounts or bankruptcy. Unless you take the necessary steps to get this withdrawn, these can stay on your credit report for 7 years after the tax liability is resolved. If successful, your credit scores could rise significantly, provided that the rest of the information on your reports is positive. Fortunately, the IRS has made some changes to its tax lien policies, making it easier for taxpayers to get liens withdrawals after paying their tax bills.

 

When deliberating on how to pay your taxes, best give your credit score a look. Armed with this information, it will be easier to determine which payment method is best suited for your current financial situation. Whatever the case, it is always a good idea to continually monitor your credit.
 
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