personal finances — February 21, 2020

Taxes and Your Credit Score: 4 Helpful Things You Need to Know

by Susannah McQuitty

Building good credit includes managing your taxes well.

Good financial health is an important part of creating opportunity for yourself. By laying a foundation for your future, you’re more likely to alleviate stress from current situations and avoid certain challenges along the way.

Improving your credit score is a great way to get started on a healthy economic status. Staying up to date on your taxes is also crucial in having a financial portfolio that’s as fit as a fiddle. So, how do credit scores and taxes relate?

Knowing how these two elements connect to each other will provide you with a deeper understanding of your expenses. We talked to our friends at Quicken Loans about what it takes to improve and manage your credit score, so let’s look at how taxes and credit scores coincide with these four helpful things you need to know!

What Is Your Credit Score?

The first thing you should know is exactly what your credit score is. Your score can be an indication to lenders of your ability to borrow effectively, so having a healthy report is vital for future opportunities. With a higher score, you’re more likely to be approved for loans, whether that be acquiring money for education purposes, getting a mortgage or funding improvement projects when you’re ready to tap your home’s equity.

This isn’t an imaginary number that gets assigned to you — it’s actually a calculation of your past spending habits based on several different factors, including payment history, credit utilization, credit history length, credit mix and any new credit you take on.

While each component is necessary to pay attention to, payment history impacts your score most significantly. That’s why it’s essential to make payments on time and show lenders that you’re a trustworthy borrower who makes their payments in the correct amount and at the right time each month. So, next time you’re considering skipping a payment, think twice about how it can negatively affect your credit score.

How Taxes Affect Your Credit Score

Just like any other financial obligation you take on, paying your taxes is another form of compensatory responsibility you experience as a consumer. Whether it’s out of your paycheck, on your property or each time you buy something, taxes are always a guarantee.

Just like any other type of debt, owing the IRS is always a possibility. The good news is that taxes don’t directly affect your credit score. However, not paying them definitely does. And, since the IRS is a government agency, it has the ability to put levies on your property or even garnish your wages, making it harder to pay off other debts you may have accrued. Instead of going down this dangerous path, pay off your tax debt as soon as you can.

Paying Off Tax Debt

Manage tax debt productively by choosing the best form of repayment for your individual circumstance. Don’t put it off either, as failing to pay puts you at risk for tax liens, or even worse, bankruptcy. Instead, try using installment agreements, credit cards or personal loans to help consolidate your debt.

Installment payments are a type of tax relief program issued by the IRS to help consumers pay off their debt promptly. These payments are similar in the way rent or car loans are due. Payments are made in small parts over a fixed period of time. Keep in mind though, that interest and penalties are still attached, so the longer your plan is, the more money you will pay in the long run.

You can also use credit cards. It’s not always recommended to use a credit card for this purpose, but if you’re low on options, choosing the right credit card to pay off tax debt is key to setting yourself up for success. Look for cards with rewards plans that amass quickly, so you’re able to offset inevitable fees or try one with a generous sign-up bonus. Just make sure your tax bill isn’t immensely larger than your credit limit, otherwise your credit score can take a serious hit.

Another way to pay off tax debt is to use a personal loan. This is best used when you need some time to pay off what you owe versus paying for it upfront. The benefit here is that personal loan interest rates are typically lower than what the IRS offers with installment payments, but your credit score is a big determinant of what the terms and conditions of your loan will be. The higher your credit score, the more options you will have to choose from that could save you money over time.

Doing Your Due Diligence

Your finances should be at the top of your mind, especially if you are at risk of being contacted by the IRS. Stay on track with your taxes to help benefit your financial future. Set reminders, mark your calendar with important tax dates or use autopay to make sure those expenses are being handled in a timely way.

If you’re having trouble keeping your spending straight, try using a helpful budgeting app where you can view all of your bills from 10,000 feet up. Many smartphone applications list your bills with their due dates so you can plan exactly how and when you should be paying for them. Remember, if you fall behind on payments, address the problem head on instead of putting it off until it’s too late.

It’s always the perfect time to get ahead on your taxes, so instead of working harder, work smarter with We do all the heavy lifting when it comes time to file, so keep stress at bay by signing up for a free account today!

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