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The Tangled Web of Taxes and Credit
How Your Taxes Can Affect Your Credit
Findings:
Released April 2005
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The average Experian PLUS ScoreSM for consumers with a tax lien in their credit
reports is 609 compared to 678 for consumers who did not have a tax lien.
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Consumers whose credit utilization is greater than 50% have an average PLUS
Score of 673 whereas consumers with credit utilization below 50% have an
average score of 679.
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Of the consumers expecting to receive a tax refund in 2005, 49% plan to pay off
debt while 6% plan to take a vacation with monies received.
Every year, consumers apprehensively gather their receipts, W-2s, and
calculators in hope that they get something back from Uncle Sam; or that they
at least pay as little as possible. The latest Experian-Gallup Personal Credit
Index shows that many consumers do not think about the impact their taxes have
on their credit.
The number of federal tax returns filed in the United States for the 2003 tax
year totaled more than 130 million according to the Internal Revenue Service
Data Book. And despite the fact that paying taxes isn’t optional, many
consumers choose not to pay their taxes. When taxes go unpaid, consumers may
find that the IRS can place a lien on their assets. If tax liens go unpaid,
they will remain on a credit report for 15 years. Paid tax liens will remain on
a credit report for seven years. According to the Experian National Score
Index, consumers who have a tax lien on their credit reports have an average
PLUS Score of 609, compared to consumers who do not have a tax lien, who have
an average score of 678.
It is important to note the impact of putting off your payments compared to
paying taxes up front. Paying taxes owed with a credit card has disadvantages
to a consumer’s wallet…and even to their credit. The additional debt may have a
negative impact on their credit score, potentially raising their interest
rates. Lower credit scores can also decrease a consumer’s buying power, causing
them to be turned down for credit for years down the road. According to the
Experian National Score Index, the average PLUS Score is 673 for consumers
whose credit usage is greater than 50% compared to the average score of 679 for
a consumer with credit usage lower than 50%.
In order to avoid the pitfalls of putting off tax payments, many consumers opt
to pay the U.S. government up front. By avoiding additional debt on your credit
cards, you will be able to not only maintain a low debt to income ratio, but
also maintain a higher score.
For the fortunate ones, Uncle Sam will be sending back overpaid taxes in the
form of a refund. According to the Experian-Gallup study, 49% of consumers
receiving a tax refund plan to pay off debt while 6% plan to take a vacation
with monies received. Consumers who utilize their refund to pay off existing
debt will likely see a positive impact to their credit score. Over time, a
consumer’s buying power may increase as their overall debt, and credit usage
decreases. Through good credit behavior such as continued on-time payments and
not overextending credit, consumers can utilize their tax refunds to positively
impact their credit score.
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