Credit scores are something that gets a lot of people in trouble.
They get into credit card debt and find out it’s hard to get a house later on in life. Other people with no debt have trouble getting a loan because they don’t have enough of a proven track record. Throw in all other types of financial obligations–like student loans, debit cards, checks, savings accounts, etc.–and you can see how it gets confusing fast. But since I know about taxes, something I get asked a lot is if past year taxes affect your credit score. And, if so, how much?
Of course, the answer is: it’s complicated.
Past years taxes do have an effect on your credit score.
Pretty much any financial obligation you’ve ever had does. Credit scores are, roughly, a measure of how good you are at getting money and then paying it back. Taxes are a good way to measure how good you are at paying what you owe.
That said, if you’re Regular Joe Tax Payer, chances are your past years taxes won’t have that big of an impact. Part of this is because it’s hard for credit agencies to get data on your taxes from the government. What information they can get is how you spend your refund, how you pay off what you owe, and so on. As long as you’re filing your taxes on time, you probably won’t see a huge impact on your credit score. For the average person, taxes act pretty neutrally on your credit score.
Are you the norm?
If you’re like most people, you’ve maybe missed paying past years taxes once or twice. Maybe you got an extension and filed it by October. Or maybe you’re someone who still has past due taxes to pay. In that case, your back taxes can affect your credit score.
When you owe taxes, you get tax penalties and fines. This counts as a form of debt. The longer you go without paying it, the more it accrues. This alone can damage your credit score, but it’s especially bad when your past years taxes cause you to have a tax lien. Tax liens have an extremely detrimental effect to credit score. So bad, in fact, that people find it hard to recover from the impact. The longer you let past years taxes sit unpaid, the harder it will hit the rest of your life.
Fortunately, you can still pay your past years taxes. There are a lot of online past tax services that help you get out of your tax debt and into tax recovery. Just remember, the sooner you pay your past tax, the sooner it can stop affecting your life.
Photo via _Dinkel_ on Flickr.
