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Does Tax Debt Lower Your Credit Score? Here’s the Rundown



Filing TaxesA 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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Financial advice

Tips for Paying off Holiday Debt Before it Hurts Your Credit



Now that the festive season is behind you, what remains with you are the beautiful memories and of course, the huge holiday debt that you accumulated.

As the new year kicks off, two factors can greatly impact your credit; how you pay (or not pay) your debt and how much of your available credit you are using. That said, late or missed payments on your credit cards can hurt your credit and so does using most of your available credit.

To help you stay on the right track, here are tips for paying off holiday debt before it hurts your credit.

1.  Cut Back on Your Expenses

One of the smartest moves in paying off debt is to avoid adding more debt. By slashing your expenses, you put your spending under control and reduce your reliance on credit. Also, you might free up some money which can go towards debt repayment.

Cutting back on expenses can take various forms depending on your spending habits. It may entail:

  • Creating a budget and sticking to it
  • Using cash instead of credit cards to pay for products or services
  • Cooking your own meals instead of eating out
  • Using public transport instead of driving
  • Re-evaluating and canceling subscriptions that you can do without
  • Decreasing your usage of utilities such as power and water
  • Shop around for better deals and lower prices on shopping

2.  Start Paying off Your Credit Card Debt

Your credit card debt is likely to hurt your credit more than any other debt. The reason being, credit cards not only carry high-interest rates but their utilization accounts for 30% of your FICO credit scores.

Credit utilization ratio (CUR) is the percentage of the credit that you are utilizing out of the total credit available.

For example, if the total available credit on all your credit cards is $8,000 and your available balance is $4,000, then your credit utilization ratio is 50% ($4,000/$8,000 X 100).

Higher credit utilization creates the impression of poor debt management. Prioritizing your credit card payments lowers your utilization rate, consequently improving your credit score and saving you money on interest payments.

Tip: Always aim to keep your CUR below 30%, and when looking to build credit, a ratio of 10% and below would be ideal.

3.  Take a Personal Loan

A personal loan is a loan that you take to use at your discretion and usually. It comes with a lower interest rate: While credit card rates can average at 14-15%, you can get a personal loan with interest as low as 6%.

You will, however, need a good credit score (690 and above) and stable income to negotiate a good deal. That said, lower scores will attract more interest but you can still land better rates than with credit cards.

As such, if diligently, such as offsetting your credit card debt, you can use the loan to save your credit in the long run. Also, personal loan lenders are increasing by the day, opening more avenues to shop around.

4.  Get a Balance Transfer Card

If you are faced with several credit cards with high interest, a balance transfer card can help you save on interest and pay your debt faster.

Typically, a balance transfer credit card charges zero or low interest for a promotional period of 12-18 months. This gives you an opportunity to pay off only the principal of your debt or if any interest, at a lower rate.

On the other hand, this type of credit card may also temporarily hurt your credit in two ways:

  • Moving your credit to the new card may increase your credit utilization ratio
  • Opening a new credit card account may result in a hard inquiry which may bring your score a few points lower
  • A new account will affect the average length of your credit history

Nevertheless, the effects of the above factors on your credit are less severe compared to the effects of not eliminating your credit card debt in the long run.

Better yet, you can still do a balance transfer without hurting your credit using the tips below:

  • Ensure that you can clear the debt without fail and within the promotional period
  • Make sure that the balance you transfer does not max out your transfer card or cause a higher credit utilization ratio
  • Avoid adding more debt to both the original card and the balance transfer card until you have cleared your debt
  • Inquire if there is a balance transfer fee and assess its financial impact beforehand

The Bottom Line

It is possible to repay your holiday debt before it hurts your credit. This, however, calls for drastic measures such as change of spending habits, consistency, discipline, and sacrifice. While at it, you might want to start saving up for the next holiday to avoid finding yourself in the same situation come next year.

For further financial advice, credit repair, and consultation, contact Credit Absolute.

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How to Avoid Racking Up Debt During the Holidays



The holidays bring a lot of excitement and cheer. But is also a time characterized by a lot of spending. Statistics show that holiday spending goes up every year in the last few years. Unfortunately, holiday expenditure can take a big chunk out of your credit card.

It may feel great while the holidays last but the feeling may not last when you find yourself up to your neck in debt accrued during the holidays. Debt can mess up your life and interfere with your plans especially at the beginning of the year. The question is; can you still enjoy the holidays and still manage to keep off unnecessary debt? Yes indeed! Here are proven ways on how to avoid racking up debt during the holidays.

Avoiding Debt During the Holidays

Work with a Budget

A budget helps you to plan for the available resources and keeps you from doing spontaneous shopping. In your budget, categorize your spending and set money allocation for each item. This can help you have a general figure of the amount that you want to spend and also help you to know where to give more weight. A budget would be worthless if you don’t stick to it; be sure to strictly adhere to it and you will be grateful.

Use Cash to Pay for Expenses

Holiday debts result from credit cards and other loans. Research shows that people who use credit cards for shopping are likely to use many times more money than those that pay cash. There are different ways in which you can put aside some cash for the holiday:

  • Sell stuff that you don’t need in the house. This can be furniture, play gear for kids, electronics, kitchen gadgets, etc. As long as they are in good condition and someone can put them into good use, they are better off bringing you some cash.
  • Set up a holiday account early in advance
  • Use your Christmas bonus to boost your expenditure.
  • Cut cost on your normal expenditure to save for the holidays

Adopt Cost-Effective Holiday Events

Taking your family for a cruise around the Caribbean Islands and lodging in 5-star hotels is a great idea. However, if you will still be struggling to pay the debt come next year; it is time to re-evaluate your options. You can still have a memorable holiday with your family and friends without necessarily breaking the bank. Here are some cost-effective options:

  • Spend time with your family and friends at home and in the process share meals and gifts
  • Plan for traveling at a time when it is likely to be less expensive and save towards it
  • Consider Picnics and Parties

Save on gifts

Buying gifts for all your family, friends and other important people in your life can turn out to be one big expensive affair and especially if you don’t have enough cash set aside to cater for this. However, you can also make the gifts genuine, thoughtful, and memorable at a relatively low cost using the following tips:

  • If you are in the service industry, offer a free session of your services as a gift
  • Get creative and make gifts such as cards for your children’s teachers, boss, workmates etc.
  • Instead of buying a gift for each of your friends, bring them together and cast lots where each buys a gift for one and gets one from another
  • When coming up with a list of gifts to buy, include other options of about the same cost to avoid spending more in case the first choice goes out of stock or is unavailable

Shop Early

Shopping early helps to spread out your spending and also gives you time to shop for great deals. Since holidays are already fixed, come up with a list of everything you need to buy and start buying. Be on the lookout for discounts and offers such as the end of summer sales and stock up on items with the best deals.

The Bottom Line

The Holidays don’t have to leave you with the bitter after taste of racked up debts. With proper planning, a few adjustments, and being flexible enough to accommodate cost-effective ideas, you can still enjoy your holiday without disrupting your future financial plans.

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How to Get the Most Out of Credit Cards During the Holidays



Is it too soon to start planning your end-of-year holiday events? That may be debatable but we all know how quick retailers are to taking advantage of increased sales brought on by holiday shoppers. With Thanksgiving just around the corner most retailers are already advertising for their big shopping events and Black Friday deals. If you, like many others, choose to take advantage of these great deals then you’ll also want to plan ahead.

The biggest temptation during the holiday sales events is to break out the credit cards in order to take advantage of the great deals while they’re available. You might be saving a lot of money on the special deals but if you’re not careful, your credit card costs could end up making those purchases cost much more than they’re worth. That’s why you need to take precautions when using credit cards for holiday purchases. Here are six ways to make the most of your credit cards during the holiday season:

1. Sign Up for a Cash Back Card

For those of you who are not already heavily invested in a specific travel rewards program, you may be better off using a cash back rewards card. For new cardholders you may be able to get a bonus cash back offer when you sign up. If you do plan on signing up for a new card with a cash back deal, look for an offer that gives you a higher cash back percentage (as much as 5 percent)  on popular retailers such as Walmart, Target, or even Amazon.

Just keep in mind that you should only choose a cash back or rewards card over a zero or low-interest card if you are able to pay your monthly statements in full. Otherwise it would be better to find a card with a zero-interest introductory rate or low-interest card as it would save you the most in the long run.

Holiday Shopping

2. Activate Your Bonus Purchase Opportunities

Many rewards cards will feature rotating bonus categories which you may need to activate or choose each quarter. If your card does have rotating bonus opportunities, make sure that you log in each quarter to activate. Also bear in mind that many of these rewards may have a limit on how much you can earn so keep track of your purchases and switch cards once you’ve reached the limit.

3. Learn About Shopping Portals

Unknown to many rewards cardholder is the opportunities available from shopping portals. Many loyalty programs and credit cards now offer online shopping portals which will allow you to earn extra points, miles, or cash back from your purchases.

These online shopping portals often feature some of the top national retailers and can usually pad your purchase rewards with extra points per dollar spent. With most airline and hotel loyalty programs, they will likely have their own portals as well. Using these websites can help you stack your rewards earning potential.

4. Examine Your Cardholder Benefits

Holiday shopping often features large purchases on items you wouldn’t normally buy unless they are heavily discounted – which is often the case during Black Friday sales events. For those bigger purchases, you may want to consider your cardholder benefits. May credit cards include benefits such as accidental damage and theft protection, extended warranties, price and return protections. These benefits can come in handy when making a large purchase, such as a new TV or computer.

5. Decide if it’s Worth Getting a Store Credit Card

If you don’t already have a great rewards or low-interest card, you may want to consider getting a store credit card. It is likely that any of the major stores that you plan to shop at during the holiday season will offer their own branded credit card. These cards should never be an impulse sign up though. You should always find out in advance if it’s worth considering.

Most of the retail credit cards will feature a very high interest rate so it is important that you consider their terms and conditions and quality of rewards programs before deciding.

6. Consider an Interest-Free Promotional Financing Offer

It is not uncommon for American shoppers to spend “too much” during the holiday season in order to take advantage of special savings and offers. That is all well and good if you are able to pay off your credit cards in a timely manner but if not, you could end up pay more in interest than the savings you earned from the discounts.

If you are unsure whether you’ll be able to pay off your credit card balances within a few months, you may want to consider opening a card with a 0 percent APR offer for new purchases. These offers allow you to avoid interest charges for six to 18 months. Just make sure you don’t keep a high balance on your card for too long as it can negatively affect your credit score.

For more financial advice and credit repair assistance, contact Credit Absolute.

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