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Paying your taxes using plastic? Not a good debt solution.

by:
Laurie Campbell

I suppose we should have seen it coming. A couple of U.S.-based entrepreneurs have developed a new service allowing debt management for Canadians by providing the ease of paying their tax bills by credit card, according to a recent piece by Toronto Star financial writer Ellen Roseman.

As Roseman explains, normally most government departments – not to mention most universities - don’t take credit card payments because of the costs associated with administering them. “The problem with credit cards is high transaction costs. Merchants absorb most of these costs, which are a big irritant to the industry.”

But now, Canada Revenue Agency is welcoming credit card payments through services provided by a Boston-based company called Plastiq, which has solved the problem of transaction costs by getting credit card customers to agree to pay a two per cent surcharge, meaning merchants now pay nothing.

The new service may hold appeal to those with enough cash to pay their taxes in full come the next monthly credit card bill. As Roseman illustrates, as a very temporary measure, the strategy can offer benefits to those who wish to bump up their Aeroplan points. But paying taxes by credit card is extremely ill advised if you simply don’t have the cash on hand to do so and need to find ways to gradually pay what’s owed.

Say you’re a self-employed soul who discovers that you owe the government $10,000 in tax dollars that you failed to set aside last year. By using your credit card through Plastiq to keep the tax man happy this year, you can count on paying a standard annual credit card interest rate running from 18 to 21 per cent – or $1,800 to $2,100 on the money owed.

Not a good plan for personal budgeting – or managing your debt.

No, as Roseman points out, you’re far better off paying the debt gradually through a line of credit if, say, you have secured an interest rate of under 10 per cent. Better still, Canada Revenue Agency charges only five per cent interest if you need time to pay up.

For those with a hefty cash flow from responsible debt management – and the ability to pay off credit cards in one fell swoop – I can see the allure of the new service. And, come to think of it, for Canadians of average income, I suppose it could be handy way of paying taxes if the amount owing is small and can be put to rest within the month.

Still, there are always those amongst us who believe that – when cornered on big debts – they can borrow from Paul to pay off Peter. In almost all cases, this is an absolute no-no in relation to the use of credit cards.

Just remember, credit is debt, and the piper will be paid – and paid lots more than what might otherwise be necessary as time goes on.

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