Can Taxes Affect My Credit Score?

Your credit score is the number that essentially allows you to be approved for future credit. Future credit can take the form of credit cards, auto loans, or even mortgages. If you’re trying to borrow money, your credit score matters.

What is a credit score?

Your credit score is a numerical expression of the risk you pose to a lender. It outlines how well you borrow money and pay it back on time and is determined by a number of factors. If your credit score is low, then you’re considered a higher risk to a bank or other financial institution. Ultimately, this means you’ll end up paying a higher interest rate.

If your credit score is higher, you’re considered a low-risk investment and you’ll typically pay a lower rate of interest over the course of your loan. If you don’t know what your credit score is, and you’re looking at borrowing money in the next year or two, you should check using a free credit score tool like Borrowell. The goal is to ensure it’s as high as possible before applying for credit so that you pay the least amount of interest possible.

How is my credit score calculated?

Your credit score is calculated by a number of factors which include the following:

Payment History – This category is reasonably straightforward and makes up the majority of your credit score. If you pay off your credit card balance every month, and all of your outstanding debt balances, you’ll be in the green. Missing payments or becoming delinquent on your accounts will ensure that this segment of your credit score starts to take a hit. Since it’s the largest category of your credit score, you should ensure that you always make on-time payments.

Types of Credit – A creditor ultimately wants to see that you’re able to manage different types of credit, so having a student loan and a credit card is favourable. While this isn’t a huge category, if you’re able to show that you can pay back a variety of different types of debt, you’ll see your credit score increase.

Credit Utilization – Having $15,000 of available credit maxed out doesn’t bode well for you when a lender is looking at your credit file! You want to have some credit available. A good rule of thumb is using around 30% of your available credit on a monthly basis and then paying it off in full.

New Credit – If you’re constantly applying for more credit, your credit score is going to take a hit. When you take on a new credit vehicle, your score will likely decline momentarily but that’s OK! As long as you’re not doing it every month, it won’t affect your score in the long term. If you plan on applying for a large amount of credit in the future, it’s wise not to take on any new credit in the months leading up to it.

Credit History – Your credit history is important because it proves how established may be. Creditors like to see that you’re able to keep and continually pay off a credit card for a long period of time. Cancelling your longest standing credit card may not be the best idea when it comes to this category.

When it comes to payment history – can taxes affect my credit score?

The answer — it depends, as it does with all things that relate to tax!

If you owe the government money when it comes tax time, it’s important that you pay them on time because it can affect your credit score. Interest, penalties, and garnishing your wages are other reasons why choosing to not pay your taxes is a bad idea. Hindering your future self from borrowing money could be a long-term side effect if you choose not to pay your taxes.

If you owe the government a small sum of money, chances are that they aren’t going to make a big deal about coming after you when it comes to your credit score. Make no mistake, they still expect you to pay that money but it’s unlikely it will hurt your score. However, if you’re in a situation where you owe a large tax bill and the CRA decides to hit you with a court case, it can affect your credit score. Your credit score can take a long time to rebuild, so it’s important to try and avoid long-term impact.

What if I owe money to the CRA?

If you owe money to the CRA, it’s important to contact them immediately. If you can’t pay the amount, there are taxpayer relief programs available for Canadians. They will work with you to create a payment plan that’s in the best interest of both parties and won’t affect your credit score.

If you haven’t filed for a number of years and you’re terrified of the interest and penalties might be, looking into voluntary disclosure programs is an option. This options can help mitigate interest, penalties, and hits to your credit score.

The last word

At the end of the day, your unpaid tax bill can affect your credit score. It’s important to be upfront with the CRA if you’re unable to pay this amount. Doing so will ensure that you are not affected long term when it comes to your borrowing capabilities.

Check your credit score for free with Borrowell in less than 3 minutes!

Janine Rogan is a CPA and personal finance writer from Calgary, Alberta. She is a passionate millennial sharing her wealth of financial knowledge with Canadians. Janine has run numerous workshops, spoken at dozens of conferences, and written over 600 articles relating to personal finance. Janine hopes to empower Canadians to take control of their finances and live a value based life. More articles by Janine can be found on her website.