Every year like clockwork – the the tax man comes – and you might be surprised to learn that your credit scores can be affected, either positively or negatively, by how you pay the Internal Revenue Service (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.
Remember, this isn’t “free money”. It’s extra cash you paid in and are finally getting back. Before you spend it on a shopping spree or as down payment on a big-ticket item that will increase your debt, consider using it to pay down existing debt instead. The more debt you pay down, the lower your credit utilization rate – and the higher your credit scores. Plus, resisting the urge to splurge can save you a lot in finance charges and put extra cash in your pocket every month!
Owe the IRS? Avoid using a credit card to 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. Not only can paying with plastic mean paying big fees – but piling on more credit card debt can hurt your credit scores and your ability to qualify for loans or competitive interest rates for quite some time. 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 and scores lately? Make tax season your reason.
Attention-to-detail is the name of the game in making sure the information we report to the IRS is correct – and that we don’t overlook valuable tax deductions that benefit us. The same mindset applies to your credit. Use tax time to scrutinize your credit reports from TransUnion®, Equifax® and Experian®. Compare information on all your accounts across all 3 bureau reports to spot discrepancies, errors or outdated information that, if disputed, could benefit your credit scores.
Keep in mind– checking your own credit WON’T hurt your scores.
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.