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The Impact of Tax Debt on Your Credit Score

On Behalf of | Oct 11, 2024 | Federal And State Tax Collections |

Tax debt can have significant consequences on a person’s financial life. One of the subtler yet devastating effects of tax debt is the reduction of the debtor’s credit score.

Although the IRS does not report tax debts directly to credit bureaus, tax debt can still indirectly harm credit scores through other means. Understanding how unpaid taxes influence credit is important for maintaining your financial health.

Tax liens

One way tax debt can affect a credit score is through a tax lien. Although the IRS no longer files tax liens on credit reports, tax authorities can still issue a lien if someone owes a large amount in unpaid taxes. This lien becomes public record, and while it will not appear on credit reports, it may still be visible to lenders. This can affect your creditworthiness and may indirectly harm your credit score if it prompts lenders to conduct a credit inquiry.

Court judgments

If the government takes legal action to collect a tax debt, a court ruling can result in wage garnishments or levies. These can negatively impact credit scores if lenders report them. These public records do not go unnoticed by creditors and financial institutions, who might view them as signs of financial instability.

Missed bill payments

Dealing with unpaid tax debt may lead to cash flow issues that result in missed payments on other bills. Failing to pay credit card bills, loans or mortgages on time can cause significant damage to your credit score. In addition, trying to keep up with multiple financial obligations while managing tax debt can increase credit utilization, another factor that can lower credit scores.

It is important to manage tax debt carefully to avoid these financial consequences. If you are struggling with tax debt, consider payment plans or other options to minimize its impact on your credit score.