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Paying for groceries? Whip out your credit card. Buying new shoes? Fish that plastic out of your wallet.
Credit cards are a major convenience for many of us. So you might have been delighted to learn that you can even charge your taxes now. Why not, right? You might even earn some miles for doing so.
Hold on, though -- there actually is a reason to bypass this option. You see, it's not free.
If you charge a pair of socks at your local sock shop, you pay the same price as someone paying cash. But if you charge your taxes, there's a little 2.49% fee involved. If your tax bill is steep -- say, $8,000 -- you'd pay $200 just for the convenience of charging.
(There's pretty much always a fee involved when you charge something, but usually the vendor pays it.)
The tax-payment fee you'd be forking over goes to a third-party processor acting as middleman between you and the IRS. Some card-issuing banks have been alerting cardholders to this option and recommending it. So be informed, and know who will enjoy the biggest benefit. Be wary if you start getting tax-paying advice from JPMorgan Chase (NYSE: JPM ) , Capital One Financial (NYSE: COF ) , or American Express (NYSE: AXP ) -- it may not be in your best interest.
What to do
Don't charge your taxes unless the benefit is worth more than the cost. One of the rare circumstances under which charging might make sense is if you will collect more in cash back -- say, 3% -- from what you charge. In that case, you'll come out ahead ... a little.
Meanwhile, there's the very real danger of getting into debt if you charge your taxes. If you don't pay off that charge pronto, you may end up paying upward of 25% on thousands of dollars of debt, which could cost you more than $1,000 per year. (If you're already saddled with credit card debt, take heart; you can dig out from under it.)
There is an insidious upside to this tax-charging proposition, though. It could fatten the coffers of credit card companies such as Visa (NYSE: V ) and MasterCard (NYSE: MA ) and the firms above. If you're an investor in them, maybe you can smile about it.