Should you use a credit card to renovate your home?

By Claudia Mollerup-Madsen

Whether your home is new, or you have lived in it a while, you may be ready to tackle some home renovation projects but may not know how to pay for them. According to one study, one out of three homeowners use credit cards to help pay for their renovation. Should you use a credit card to pay for home renovations?

As a financial advisor, I always counsel my clients to employ caution when using credit cards and potentially setting themselves into debt. Even though I feel that way, using credit to pay for a home renovation can be a beneficial financial tool if done right.

When to Use a Credit Card

Using a credit card to strategically pay for your home improvements can help provide additional benefits for you. For example, using some credit cards may net you rewards from the card reward program. Whether it be airline miles, hotel points, or gift cards to a store, the benefits can be substantial. This strategic decision becomes even sweeter if you can sign up for a 0% interest period or secure a sign-up bonus.  A recent study found that $100 Billion in reward points lay unclaimed by earners. Make sure you understand the perks and make a plan to use your rewards.  They can be a valuable financial resource.  Assuming you have the cash savings to pay off the card quickly before the interest rates do kick in, you can really take advantage of the credit card perks.

The Fine Print

The key is paying off the credit card balance quickly; otherwise the interest rates can sink you. Ensure you read the fine print to see what happens if you do not pay off the balance within the agreed upon term. And, watch out for deferred payment deals. Deferred payments are not the same as 0% interest.  If you pay your balance off before the end of the term, you pay no interest.  However, with deferred interest if you do not pay it back with the term, you will be responsible for paying all of the interest of the entire loan, even the period where it was deferred. Usually the interest rate is higher as well, creating a double whammy. Beware of the fine print and make sure you know all of the terms of your agreement.

Home Equity Loans and Personal Savings

While a credit card option can provide some tangible benefits, sometimes the risk of not paying the balance off in time is just not worth it. Instead consider other financing avenues such as home equity loans or using personal savings. A home equity loan allows you to use the equity in your home as your collateral in securing a loan.  

Another option is simply to save the money needed to update your home. By putting aside money each month, you won’t have the benefit of credit card rewards or sign up bonuses, but you won’t have a loan to repay with interest either. Saving the money before the renovation begins is a smart option to keep your head above water and out of debt.

Whichever financing option you choose, make sure you know the terms of your agreement and shop around for the best financial deal. Just because others are using credit cards, does not mean you have to jump on the bandwagon, too. 

Claudia Mollerup-Madsen is Vice President and Financial Advisor with the Wealth Management Division of Morgan Stanley in Houston.

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