Pay taxes with credit card? Fees may eat rewards

ByABC News
March 26, 2012, 4:40 PM

— -- Like extreme couponers who dive into dumpsters in search of newspaper circulars, credit card rewards chasers will go to great lengths to earn points. A $100 gas fill-up? Whoo-hoo, double points! An emergency appendectomy? Doctor, do you accept American Express?

The last few months have been particularly lucrative for rewards chasers. Credit card issuers have sweetened their offers, showering big spenders with airline miles and cash. Perhaps you're wondering if the upcoming tax deadline presents an opportunity to add to your stash. The IRS accepts plastic, and the prospect of a free trip or upgrade could take the sting out of your annual obligation to Uncle Sam.

Sadly, though, the cost of paying your taxes with a credit card usually exceeds the value of the rewards, says Jeffrey Weber, founder of SmartBalanceTransfers.com. That's because unlike retailers, the IRS doesn't absorb the convenience fees charged by third-party service providers to process the transaction. Convenience fees range from 1.89% to 3.93% of your payment.

Here's the problem: The maximum cash back from most rewards cards is 1%. A few issuers give cardholders a year-end bonus that pushes the reward up to 1.5%, but even then, you're paying more in convenience fees than you'll get back in cash, Weber says.

When paying your taxes with a credit card could pay off:

•You get air miles and use them on upgrades. The rewards' value may exceed convenience fees, but don't count on it, Weber says.

•The tax payment helps you qualify for an introductory offer. Some of the most lucrative credit cards rewards are restricted to new cardholders who spend a certain amount of money within the first three or six months. For example, the Chase Sapphire Preferred Card gives new cardholders 40,000 bonus points if they spend at least $3,000 in the first three months. In such cases, the value of the bonuses may exceed the cost of the convenience fees, Weber says.

Unintended consequences

Even if you manage to overcome the convenience fee, there are drawbacks to paying your taxes with a credit card, including:

•Your credit score could take a hit. One of the factors used to calculate your FICO score — the most widely used credit score — is your "credit-utilization ratio," which is based on the amount of debt you have outstanding as a percentage of your available credit. If you owe the IRS a lot of money and put that on your credit card, "it will have an immediate impact on your score," says John Ulzheimer of SmartCredit.com.

The impact will be short-lived if you pay off the balance at the end of the month, he says.

•Unless you pay off the balance before the due date, interest costs will exceed the value of your rewards. Most rewards chasers diligently pay off their credit card balances every month, and with good reason. Rates on rewards cards tend to be higher than those for credit cards that don't give away cash and airline miles.

But suppose you use a rewards card to pay your tax bill, and a calamity, such as a medical emergency or job loss, prevents you from paying it off before the due date. Overnight, "you're stuck with 16% (to) 18% interest," says Curtis Arnold, founder of CardRatings.com. "That's just a gamble you don't want to take."