Should I Pay Off Taxes or Credit Card First?

If you owe both income taxes and more credit card debt than you can handle, that raises a significant question. Does it matter which debt should take priority?

Yes, it matters a lot. Simply put, you don’t want to owe the IRS money. The IRS has more power to penalize nonpayment and force you to pay up than any financial institution. You should make every effort to satisfy all of those to whom you owe money, but taxes are a priority.

IRS Penalties vs. Credit Card Interest

The average credit card interest rate is 23.77%, or about $99.04 per month. You would pay 6.59% on tax debt, but there are additional fees and penalties to weigh when you can’t pay your taxes.

Here is a breakdown of the penalties for not paying tax debt.

Interest: Federal short-term rate plus 3%, which was 6.59% in April 2026. On a $5,000 debt, that would be about $27.46 per month.

Failure-to-pay penalty: Late payment fee comes to 0.5% (up to a maximum of 25%) of the original debt each month until it is paid in full. For example, if you owe $5,000 in taxes. The late payment fee is $25/month with a maximum fee of $1,250. If you agree to a repayment plan, the fee is lowered to 0.25%. The fee increases to 1% if the IRS sends a notice of intent to levy property and your debt is still unpaid.

Failure-to-file penalty: Not filing your taxes results in a fee of 5% (up to a maximum of 25%) for each month your return is late. Returns that are over 60 days late are subject to a minimum penalty – the lesser of $210 or the total amount of unpaid taxes.

Rates and penalties can change, so confirm these figures with the IRS before deciding.

Consequences of Not Paying Taxes

If the interest and penalties don’t scare you into paying your tax debt, the IRS has other weapons in its arsenal. It can simply take the money right out of your hands.

You’ll have plenty of notice before it comes to this. The IRS is required to send a written letter with the deadline to pay your debts in full. The notice will also list the charges, including taxes, interest and penalties.

If you still cannot pay your debts, the IRS will send Final Notice of Intent to Levy, which typically escalates in three steps:

1. Garnishing wages: The IRS will take money out of your paycheck, leaving only what is needed to pay basic living necessities.
2. Seizing assets: The IRS can hold up your bank account, and after 21 days, send the funds to themselves. They can also seize your property and sell it to recoup their money.
3. Taking future tax refunds: Future tax refunds will be used to satisfy previous tax debt.

The IRS doesn’t need to go to court to garnish your wages or seize your property. The best ways to reduce your risk of IRS penalties are to make sure to file your return, respond promptly to IRS notices, set up a payment plan and don’t miss deadlines.

Consequences of Not Paying Credit Cards

There are severe consequences if you stop paying your credit cards, too.

First come late fees, which average about $30 up to $41. If you are 60 days late on your payments, credit card companies are allowed to increase your interest rate, and penalty interest rates of 29.99% are common.

After three consecutive missed payments, credit card companies’ next step may be to sell your debt to collection agency. You’ll begin to receive a barrage of collection calls.

As the debt continues to go unpaid, the credit card companies or collection agencies will take you to court to retrieve their money. They can file a lawsuit, called a judgment, and if approved, your wages could be garnished, or your bank accounts could be frozen. States laws vary in what credit card companies are allowed to do; some restrict or prohibit garnishment.

That sounds a lot like what the IRS can do, but the IRS doesn’t need the court system to garnish wages or seize property. In addition, if you can’t pay your credit card debt, there is a way out – bankruptcy. You might be able to discharge your credit card debt through Chapter 7 bankruptcy, but tax debt is nearly impossible to discharge.

Try not to let it come to that. Before the third missed payment, call the credit card company and ask about getting hardship/temporary rate reduction. Also, make a priority of paying at least the minimum on highest-risk accounts.

How to Decide What to Pay First

To be clear, there isn’t much of a decision. In an either-or situation, pay your taxes rather than credit cards. There may be times when you’ll want to pay your credit card debt first and delay tax payments, but it’s risky. Here are some questions to ask yourself.

• Are you already behind on filing your taxes? File immediately. Regardless of how much you owe, failure to file compounds the problem.
• Are your cards already delinquent? Contact your credit card company about being put on a hardship program that can buy you some time to get your credit back on schedule.
• Is your credit debt significantly greater than your tax debt? It’s possible that your tax penalties may be less than the additional credit interest and fees, so delaying your tax payment may make sense. But don’t delay filing your tax return, even if you can’t pay right away. Contact the IRS about payment plans. Make sure the IRS knows you’re aware of your situation and aren’t trying to dodge your tax obligation.
• Is your tax debt delinquent or overdue? This is a big deal. Assuming the IRS hasn’t reached out to you, reach out to them.

If You Can’t Pay the IRS in Full

If you cannot pay your taxes in full, do what you can. File your tax return on time (by April 15) to avoid failure-to-file penalties. The IRS will charge interest and a failure-to-pay penalty on the unpaid balance.

You can set up short-term (120 days) or long-term (up to 72 months) payment plans. You can request a temporary delay if paying prevents you from covering basic living expenses. If you cannot pay the tax and believe you will never be able to, you may be eligible for an offer in compromise, which allows you to settle your tax debt for less than the full amount owed. Contact the IRS to explore these options.

If you tried to comply with tax laws but couldn’t due to circumstances beyond your control, you may qualify for penalty relief. If you received a notice or letter, verify the information is correct. If the information is not correct, follow the instructions in your notice or letter. If you can resolve the issue, a penalty may not apply.

Whatever you do, don’t ignore letters from the IRS. They aren’t going away, and penalties are hard to reverse once they are imposed.

Do this today

• File your return. There is a separate penalty for non-filing.
• Gather income/expense information. You’re going to need to have precise records to answer IRS inquiries.
• Contact the IRS. Be proactive. IRS penalties add up over time, so try to resolve issues as quickly as possible.
• Keep records of communications.

If You Can’t Pay Your Credit Cards

Credit card debt may seem like your biggest financial problem, but it’s not your only obligation – or even your most important. In deciding how much you need to pay to deal with credit debt, make sure to hold back enough money to take care of the essentials – housing, utilities, food and transportation.

If you can’t pay your credit card, get in touch with your card company right away. Ask for a hardship program, which can lower interest rates temporarily or waive fees for those dealing with financial struggles like unemployment or medical emergencies. The company may require you to freeze or close your account, so you can’t make more purchases. Even if the account doesn’t get closed or frozen, it’s a good idea to quit using the card to avoid making a bad situation worse. Here’s an idea of what to say when you call the credit card company:

• “I would like to speak to the hardship department regarding a temporary payment plan. I am experiencing a financial hardship.”
• “I’ve (lost my job/had a medical emergency) and I want to pay my debt, but I cannot afford my current minimum payment.”
• “I can afford to pay (suggest a monetary amount) per month for the next three months. Can we restructure my payments and temporarily lower my interest rate?”
• “Can you waive the recent late fee while I work on this repayment plan?”
• “Please send me an email or letter detailing this agreement before I make the first payment.”

Debt Management Plan: Consider seeking a debt management plan, which reduces the interest rate on credit card debt to about 8%. If you owe $5,000 on credit cards and the interest rate drops from 25% down to 8%, interest payments drop from $333 a month to $105. That’s a saving of $228 a month, which you can apply to your balance to pay off the debt faster. Plans are offered by nonprofit credit counseling agencies, who work with creditors to reduce interest rates to a manageable level.

Debt Consolidation Loan: Another option is a debt consolidation loan from a bank or credit union to pay off all credit card debt for multiple cards. If you owe a total of $10,000 on four credit cards, you take out a $10,000 debt consolidation loan and pay off the three credit cards. Now, you make just one monthly payment to the bank/credit union instead of four credit card payments, likely for a lower interest rate, saving money and simplifying payments. To make this work, however, you need to rein in your credit card spending.

Debt Settlement: A highly advertised debt-relief option is debt settlement in which for-profit companies who specialize in this service with the credit card companies so a consumer pays less than what is owed. The payment usually is made in a lump-sum and comes after 2-3 years of saving for the lump sum and negotiating with one or more creditors to get them to agree to this. It can be a long process, and it puts a damaging mark on the consumer’s credit report for seven years.

Bankruptcy: This is the last resort. Bankruptcy is painful, but it gives consumers a second chance to get their finances in order. There are two major types of bankruptcy, Chapter 7 and Chapter 13. In Chapter 7, non-exempt assets are sold by a trustee appointed by the court and the money is used to pay off debts. Key assets are exempt from this process, notably your home, car, personal items needed for work, pensions and Social Security. In Chapter 13, you keep your assets in exchange for making regular payments to the trustee to pay down debt. Your credit score may drop 100-200 points, and bankruptcy stays on your credit report for 7-10 years, making it more difficult to get credit for a home or car loan in the future.

What About Paying My Taxes WITH My Credit Card?

Can you? Yes. Should you? Probably not.

First, the IRS-approved credit card processors add surcharges of 1.75% or 1.85%. That’s at least $17.50 in surcharges for every $1,000 in a tax bill.

Then, there’s the difference in interest rates. The average credit card charges 23.77% in interest compared to 6.59% the IRS charges in late tax penalties. IRS repayment plans are more affordable. Using a 0% introductory credit card offer might work, but if you don’t pay off what you put on the card before the introductory rate expires, you’re looking at a high interest rate for what remains.

The best scenarios for paying your taxes with a credit card are when you already have enough money to cover the tax bill. Some credit cards offer 2% cash back rewards. You could make some money in that situation, but not much after you pay the processing fee. If you’ve found a credit card that offers substantial bonuses for charging a certain amount of money on the card in the first few months, it might be worth the surcharge to get that reward – assuming, of course, that you’ve got the cash to immediately pay off the credit card charge.

Bottom Line: In Most Cases, Taxes Come First

Since the penalties for tax non-filing and nonpayment are so severe and enforcement actions harder to fight, it’s hard to think of a scenario where paying credit card companies instead of the IRS is a winning move. If you’re in a situation where you can’t fully take care of either party, your first step is to communicate. Find out about tax payment plans, which can range from four months to up to six years, and credit card hardship programs.

Consider overall strategies like debt consolidation or debt settlement. If you run out of options, bankruptcy is costly but gives you a chance to start over. Contact a nonprofit credit counseling agency, like InCharge Debt Solutions if you need help deciding what action to take. Such agencies can help you create a budget, devise a repayment strategy or a debt management plan to fit your situation.