Should you pay for your home renovation with a credit card?
Are you planning to renovate your home in 2017? There's a better than 50/50 chance that you are, if a recent poll by LightStream is accurate. The January 2017 LightStream Home Improvement survey found that 59 percent of homeowners plan to spend money on renovations during this year, with 42 percent of the planned renovations costing $5,000 or more.
Surprisingly, while 60 percent of those planning renovations intend to fund their project out of savings, 29 percent plan to pay for their home improvements with a credit card. That's far more than the 9 percent expecting to use a Home Equity Line of Credit (HELOC) or the 7 percent who prefer to take out a home improvement loan.
Use of credit cards to pay for home renovations appears to be on the rise. The 29 percent cited in the 2017 survey represents an increase of four percentage points over the 2016 survey.
Is it wise to put such a large expense on your credit card? That depends on your financial situation and your renovation plans.
Paying for home renovation costs with your credit card can earn significant credit card rewards, but those rewards can be quickly negated by interest charges if you have to carry a balance. Review your renovation budget to see how long it will take to absorb the costs, and whether the costs can be spread out evenly enough that you can avoid carrying a balance throughout the entire project.
Compared to a HELOC or a home improvement loan, credit cards are likely to have considerably higher interest rates. If your renovation budget is likely to surpass your cash flow, it makes more sense to review loan options and rethink the use of plastic. There's no guarantee that loan terms will be better, especially if you have a poor credit score or enough collective debt that you only receive high-interest rate offers, but at least you have options to consider. (You should probably also consider whether you can afford to renovate at this time.)
Do you need to move forward quickly with your renovation? If so, credit cards may become a more attractive (and instantaneous) option – but loan approval process times vary by vendor, and you may be able to find loans with attractive terms that only delay your plans by a few days.
In essence, if you can't afford to pay off your renovation costs out of your savings, you should compare your credit card terms with loan options. How do HELOCs or home loans that you can qualify for compare to your credit card interest rate? Use online resources to compare the interest charges over the life of a loan with the estimated interest charges on credit card balances. Don't forget to consider the effect on your credit score under either scenario. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
If you can afford renovation costs up-front, it probably makes sense for you to use your credit card instead. Pay off all charges at the end of the month, and reap all the possible rewards. You may temporarily close in on your credit limit and lower your credit score, but your credit score should fall back into shape once your spending returns to normal levels.
Perhaps you can apply your credit card rewards toward a final accent piece that makes your renovation complete – or take a well-deserved vacation instead. You can always enjoy your new home renovations when you return.
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