Can Tax Debt Damage Your Credit?

A good credit score can make life easier, so ensuring your decisions have a positive impact rather than a negative impact on your score is best.When it comes to your tax debt and how it can affect your credit score, it may not be clear if this type of debt affects your score, so you may have questions.

You’ll first want to make sure you understand how credit scores work if you want to fully understand what effect, if any, your tax debt can have on your credit score.

How Are Credit Scores Calculated?

When you apply for a home loan, credit card, or even auto insurance, your approval may be dependent upon your credit score.Creditors like to see that you are financially responsible, and your credit score gives them insight and answers questions about your ability to successfully manage your debts.A lot is taken into consideration when calculating your credit score, and depending on the information that is reported, your score could fall anywhere on the scale.

What Effect Does Tax Debt Have on a Person’s Credit?

Many Americans will have a tax debt they are responsible for at some point in their lives.

And some may not have paid off that debt just yet.Since your credit score factors in your total amount of debt, you may assume that your tax debt is included in this amount.Although tax debt is a debt, it actually is not factored into the debts that are used to calculate your credit score.

In the past, when you owed a tax debt and failed to or refused to pay it, the IRS would file what is known as a Notice of Federal Tax Lien.Basically, this notice stated that the IRS has claimed ownership of your property until the tax debt was paid or another resolution was reached.

Since this notice would tell creditors that you had not paid your federal tax debt, when creditors would see the Notice of Federal Tax Lien, it made it difficult to get approved for credit.This was likely because there would be concerns about a consumer’s ability to repay their debts.

All of this changed in 2017 when the three credit bureaus, Transunion, Equifax, and Experian, decided they would no longer list federal tax liens or judgments on credit reports.From that point on, tax liens no longer affected consumer credit scores.Past tax liens were also removed from credit reports if they were still listed.

Consumers should note that although federal tax liens no longer have an impact on your credit, a Notice of Federal Tax Lien can still be filed.

Like any debt that you owe, you can’t ignore tax debt because there are other ways your unpaid tax debt can negatively impact your life.If you owe tax debt, rather than ignore it, you’ll want to pay it.It would be ideal for taxpayers to make their payments by the due date, but those who can’t pay in full have options that will allow you to settle your debt over a predetermined amount of time and avoid a tax lien or any other consequences of unpaid taxes.

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Frequently Asked Questions

Certainly. Unlike personal loans, you won't face any penalties for settling your balance ahead of schedule. However, it's crucial to keep in mind that if your credit card comes with a 0% introductory offer, it's essential to clear your balance completely before the 0% promotion expires and interest charges apply.

However, you can include additional cardholders, each with their own card. While sharing the single credit limit, the primary cardholder remains responsible for settling the debt.

Potentially, yes. Credit card APRs are typically variable, allowing lenders to change rates, impacting your monthly payments. Additionally, be mindful that introductory 0% offers can lead to higher interest rates once they expire. So, it's wise to clear your balance before that happens, if feasible.

Indeed, credit builder cards exist for those with less-than-ideal credit scores. These cards offer lower credit limits (typically £150 to £1,200) and higher interest rates. Responsible use, including full and on-time payments, can gradually boost your creditworthiness, potentially opening doors to better credit card offers down the line.