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Do taxes affect your credit score?

minute read

    Federal taxes due to the IRS on April 15th each year do not directly affect your credit score, but how you pay for them can.

    According to Experian™, credit reports “don't track tax bills or payments, so your record of paying taxes on time, or failing to do so, does not factor into the calculation of your credit score.” However, not paying your taxes or using a specific payment method—such as a credit card—could indirectly hurt your score.

    Whether we like it or not, taxes are a part of life. We must pay them to reap the benefits of government programs (Medicare, Social Security, etc.) as well as to fund the construction and maintenance of roads, bridges and the many other infrastructure investments done at the federal level. Also, it’s the law; paying taxes keeps you out of trouble you really don’t want to be in!

    In this article, you will learn about:

    • Common ways of paying taxes
    • What happens to your credit if you don’t pay your taxes
    • Tax liens
    • If the Internal Revenue Service (IRS) reports to credit bureaus

    Common ways of paying for taxes

    That time of year rolls back around and you know what you need to do—file and pay for taxes. There are a few ways you can go about making these dreaded (but necessary) payments. According to the IRS, common ways of paying for taxes include, but are not limited to, the following:

    • Via electronic funds withdrawal—if you or a tax professional is using a specific software to e-file your taxes, you can withdraw funds directly from your bank account to pay for your taxes.
    • Credit or debit cards—you can use your credit/debit card to pay online, over the phone or through your digital/mobile wallet. Note that there are fees for using credit cards to pay taxes.
    • Pay with cash—you can do this by working with participating cash processing companies.
    • Installment agreement—where you can pay for your taxes over an agreed-upon, extended period of time with interest. Note: You may need to pay additional setup fees.

    What happens to your credit if you don’t pay your taxes?

    Payment history is a major factor considered in your credit score, and this applies to taxes as well. Depending on which method you use to pay your taxes, you may be wondering: Does filing taxes late affect my credit score?

    Regardless of which method you use to pay taxes, you can hurt your credit score if you don’t make your payments on time. This is due to the fact that payment history—which reflects your ability to make consistent, on-time payments—is a heavily weighed factor when determining credit scores. Additionally, late payments can hurt your credit score and appear on your credit report.

    If you’re using your credit card to pay your taxes, be mindful about paying your bills on time and be aware that interest rates — which are generally very low — could increase your overall debt owed . Like any other credit card payment, paying your taxes on time can help protect (and may even improve) your credit score.

    You may want to monitor your credit with Chase Credit Journey® to help keep track of how your financial behavior can negatively (such as not paying your taxes) or positively (paying your taxes) affect your credit score.

    Tax liens

    When you don’t pay your taxes, you might be subject to a tax lien. This is a legal document that indicates the government’s claim against your property after failing to pay back the amount you owe to the government. This happens after you’ve already been sent a bill (a Notice and Demand for Payment) and continue to neglect your payments.

    While tax liens do not appear on credit reports, they are still considered a public record. That means potential lenders could be aware that you owe this money, and this could affect your chances of getting approved for loans, mortgages and more.

    Does the IRS report to credit bureaus?

    The IRS does not report to credit bureaus, and as of 2018, tax liens no longer appear on credit reports. Your taxes, tax liens or debts won’t be included in your credit history. However, the IRS may send your tax debt to a collections agency, which can impact your credit score, as collection is considered a derogatory remark. A derogatory remark is a negative item that remains on your credit report for 7 years and can hinder you from receiving approvals for loans, superior interest rates and more.

    Bottom line

    Taxes are an inevitable fact of life and we must pay them—however, they only affect our credit scores if we ignore them or fail to make payments in a timely manner. That’s why taking proactive steps, such as setting aside cash to reserve for taxes each year, can help you avoid hurting your credit score.

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