Home improvements and renovations can ramp up the value of your home and make your home better suited to your needs. The 2018 LightStream Home Improvement Survey showed 58 percent of homeowners say they had planned on spending money to make their homes better.
The survey also revealed that 30 percent of them intended to pay for those projects with credit cards. Is that a good or bad idea?
“It is almost automatic for most people, especially those who cannot afford to pay upfront, to take advantage of the convenience of credit cards,” says Stacy Francis, president and CEO of Francis Financial in New York City. She frequently appears in media outlets such as CNN, PBS, The Wall Street Journal and USA Today.
But even for those who have the funds on-hand, credit cards also allow for a lot of flexibility. Credit cards are often protected against contractor fraud or botched projects, and there are many perks that the credit card companies offer, such as points or miles.
“So, the rising number of people using credit cards to pay for their house renovation is not really such a surprise, and it will probably only increase in the future. It is important to note that one should not use a credit card unless he/she can pay this off at the end of the month due to large interest charges,” she adds.
Is it wise to put such a large expense on your credit card?
There are several factors to consider when making this kind of decision, Francis explains. How much credit do you have? Are you already carrying a balance on your card? How soon will you be able to pay off this expense?
If you already have debt and a concern about the interest rate you are paying, then this might be a burden you should not take on. Otherwise, using a credit card for such a large expense is a great way to receive credit card rewards.
What are the advantages and disadvantages of putting home renovations on a credit card?
Convenience and immediacy are the greatest advantages of using a credit card, Francis says. And of course, if property values are increasing quickly, it makes sense to move quickly. But this would depend on real estate market ups and downs, plus how long you plan to live in your home.
As for the downsides: if you miss a credit card payment, you may be dealing with an APR of 21.99-26.99 percent, and this can also have a negative effect on your credit score. If you choose not to open a dedicated credit card for this expense, having a large balance on your card can leave little room for flexibility in day-to-day living.
Which credit cards are best for paying for home improvement projects?
There are many credit card options to choose from. If you have good credit, and you need a few months to pay off this large expense, you might consider applying for a new credit card that offers 0% interest for the first year, just for this particular expense, Francis adds.
“It lets you spread the big expense of a home renovation over multiple payments, to avoid shocking your budget with the cost of all of it at once. Moreover, some of these cards come with rewards points and other benefits, such as purchase protection.”
If you know you’ll pay off the card’s balance before the 0% introductory APR offer ends, you can take advantage of all the perks without paying any interest or fees.
The credit cards from big box stores, such as Home Depot, Lowe’s or IKEA, offer the option to make monthly payments, get special discounts, free shipping and other perks, such as 5% back on purchases.
Some credit cards from banks offer a bonus in the first year. The Chase Sapphire Preferred card, for example, offers a 50,000-point bonus if you spend $4,000 in your first three months (that’s $500 cash back or $625 in travel rewards). With an airline credit card, you can earn miles and points for free trips, including flights and accommodations. So, you could be making a big saving towards your next vacation getaway. Once again, it is important not to get carried away with the appeal of awards and only sign up for a card if you can pay it off.
What are other ways to fund a renovation?
One possibility for funding a renovation is through a refinance, such as Home Equity Line of Credit (HELOC).
“When choosing between credit card and other payment options, you should consider interest rates among those,” Francis says. “By all means, it is good to have other options, such as Home Equity Line of Credit. Keep in mind that some lenders have specific rules regarding home equity products.”
For example, some lenders will not lend an equity line on a condo. Interest rates on HELOCs are slightly lower than home equity loans, but since the rate is not fixed, they may rise as interest rates rise. This can have an impact on your credit score under either scenario.
Borrowing from a friend or family member might be another option. But for larger projects, it might be more suitable to look into a Home Equity Loan, using funds from Title I Loan or borrowing from your life insurance. However, consult with your CPA and Certified Financial Planner (CFP) as to the consequences of these options, Francis suggests.
How much of your line of credit should you use?
Your goal should be to not spend more than what you can completely pay off once your credit card bill comes, assuming your credit card charges interest on unpaid balances, Francis says.
Factors to consider when using a credit card for home improvement:
- 0% APR period – allows you to avoid paying interest and fees for a certain amount of time
- Only put on the credit card what you can realistically afford to pay after typically a year or 18 months (whenever the introductory 0% period ends)
- Home improvement stores offer store credit cards with deferred interest, which is not the same as 0% APR.
- Deferred interest: if you haven’t paid off your balance by the time a deferred interest period ends, you’ll owe all of the interest that has been accumulating throughout that period
- Rewards offered – Some cards give cash back which you can use to pay off the balance
- Extended warranties – Some card issuers offer extended warranties, which will extend the terms of the original manufacturer’s warranty on warranties of 5 years or less. This means you can get extra protection is the unexpected happens and your new appliance or other big purchase breaks.
“It is important to remember that using the credit card will hurt your credit score as you would be using the upper echelon limit of the card and this has a negative impact,” she says.