How You Handle Your Taxes Can Help or Hurt Your Scores

The taxman takes and gives – and you might be surprised to learn that your credit scores can be affected, either positively or negatively, by how you pay the IRS or how you spend your windfall. Here are a few tips that can make a difference in your short- and long-term credit health.

Getting a tax refund? Think about how you use it.

Using your refund to run up your credit cards on a shopping spree or as a down payment to finance a big-ticket item could increase your debt and impact your scores. Consider using your refund to pay down existing debt instead, which could raise your credit scores because you’ll have more available credit. Lower balances will also save you money every month in interest payments.

Owe the government? Watch how you pay.

With tax season looming large, you may think that paying your federal income taxes with a credit card sounds like a good option. Think again. Piling on more credit card debt can hurt your credit scores, particularly if it pushes your credit usage to 30 percent or more of your available credit limit. And if you don’t pay off the debt immediately, you will also be subject to finance charges.

 Facing a tax lien? Take action to avoid it.

But whatever you do, don’t ignore the IRS. Failure to respond can result in a tax lien that will stay on your credit reports for seven to 10 years, even after you pay it off. If you think financial difficulties will impact your ability to pay your tax bill on time or in full, it’s best that you contact the IRS to negotiate a payment plan right from the start.

Have you “audited” your credit reports? Remember, identity theft and tax fraud go hand in hand.

Every year, thieves steal billions in tax refunds. If you’re not already actively monitoring your credit reports for unauthorized activity that may pose a threat to your scores, finances and personal information, tax season is prime time to get protected. Use tax time to scrutinize your credit reports from TransUnion®, Equifax® and Experian®. Compare information on all your accounts across all three bureaus to spot discrepancies, errors or outdated information that, if disputed, could benefit your credit scores.

Leave a Comment