Tax Time: Can Your Income Taxes Affect Your Credit Score?
April 8, 2014
With the April 15th tax deadline quickly approaching, now is a good time to answer a question that many people may not stop and think about: Can your taxes affect your credit and credit score?
Although having to pay a small tax bill may not affect your credit, other tax situations—specifically how you pay or don’t pay your tax bill—can indeed affect your credit and can lower your overall credit score.
If you have a large tax bill, try not to be tempted into putting it on your credit card. Unless you pay off 100% of that bill on your next payment cycle, your credit utilization ratio—which is the total amount of revolving credit as compared to the limits for all of your accounts—will take a hit. Your credit utilization ratio is 30 percent of your total credit score, so a large tax bill charged to one of your accounts can reduce your credit score quite a bit. Plus, charging your tax bill to your credit card could lead to getting behind on your credit card payments, which is definitely something you don’t want.
Also, you should think twice before taking out a personal loan to pay your tax bill. Not only will that loan show up on your credit report, but the loan application itself will count as a credit inquiry, although the credit inquiry will probably lower your score only a small amount. A better option is to consider an installment agreement directly with the IRS. Such an agreement is usually not reported to credit agencies, so your credit score will not be affected. And, just like putting your tax bill on your credit card, taking out a personal loan to pay off your tax bill does open up the possibility of late or missed payments.
The biggest way you can affect your credit and credit score is by not paying your taxes at all. If you owe more than $10,000 and fail to pay, the IRS automatically files a tax lien once your tax bill is delinquent for 30 days. A tax lien is a huge negative on your credit score and could stay on your report for seven years after the tax lien is resolved. Failing to pay your tax bill is comparable to not paying your mortgage anymore; in other words, not paying your taxes can completely destroy your credit, so avoid taking this route at all costs. Even if you owe less than $10,000, the IRS can still file a tax lien, although the timing and circumstances of the lien will vary depending upon the situation.
In the end, if you’re faced with a large tax bill, the smartest thing to do is to sit down and talk with a certified tax accountant. They will be your best source of information on how to avoid damaging your credit.
For 25 years, Omega Financial has been serving mortgage clients in Massachusetts. Our brokers have more than 60 years in the mortgage business. You always will receive fast, courteous, and accurate information. Omega Financial, Inc. is a company duly licensed to operate in Massachusetts as a Mortgage Brokerage. They are located in the Town of Norwood, Massachusetts where they have been operating as Omega Financial Incorporated since 1988. Licensed by the Commissioner of Banks - License No. MB2671