Should you use a credit card to pay for home remodeling projects? Explore the pros and cons.

home improvement tools in shape of house

According to a recent report, 1 in 3 homeowners used a credit card to pay for at least part of a home remodeling project in 2017. Using plastic as a method of home improvement financing isn’t new, but the trend appears to be growing, particularly among millennials. But charging remodeling costs may not be the most financially savvy solution. 

The report, released by home remodeling and design platform Houzz and financial services provider Synchrony, found that the typical homeowner who used a credit card for remodeling projects spent a median of $10,000 on renovations and charged $1,500 to $4,800 of that total. Only 5 percent of homeowners used a credit card to finance the entire remodeling project.

After calculating the totals, the companies estimate that consumers used credit cards for $141 billion in home improvement products and services in 2017, a 13 percent increase from 2016.

Although more people appear to be relying on credit for home improvement costs, it’s not always the best choice for every homeowner. However, if no other financing option is available and the borrower uses their credit strategically, it may be beneficial.

According to Nino Sitchnava, principal economist for Houzz, 1 in 4 homeowners surveyed cited card rewards as the primary reason for using plastic, and 58 percent said they were taking advantage of a no-interest promotion. For 44 percent of homeowners, credit cards were a lower cost alternative compared to other financing options.

“We do still see that a typical renovating homeowner charges up to 25 percent of their renovation spend on a credit card,” said Sitchnava in a statement to CNBC. “Most aren’t using credit as their primary method of funding. They just take the edge off.”

According to the report, millennials were more likely to utilize credit cards for home remodeling projects than older generations, with 41 percent doing so versus 34 percent of homeowners between the age of 35 and 54. Sitchnava also pointed out that younger homeowners were more likely to use credit out of necessity.

“There aren’t that many financing options available to them,” she said. This is due to many having to deal with the burden of student loan debt, while others may be new homeowners who haven’t built up enough equity to tap into.

When does it make sense to use a credit card to pay for home remodeling projects?

Some financial experts would say it could be a smart move as long as you will have the cash to quickly cover the purchase and if your card offers advantages such as cash or points rewards. However, if you’re fairly certain you will need to repay the debt over a longer period of time, using a credit card may not be the best option.

Another risk factor worth considering if you’re thinking of using plastic, is the risk of over improving and overspending. With credit cards, it can be tempting to spend liberally. Having such easy access to funds may make it difficult for those with less-disciplined spending habits to stick to their budget. According to Remodeling magazine’s annual Cost vs. Value report, the average home remodeling project only recoups 56.8 percent of its cost in added home value.

Experts advise comparing all avenues and paying close attention to interest rates. Even if your credit card is offering a no interest period, make sure you’ll be able to repay your debt before the no interest period expires. If you cannot, you could wind up paying considerably more than if you had chosen a different financing solution. Likewise, beware of promotions that offer deferred interest. These arrangements usually mean you are still responsible for paying the interest, just at a later date.

What are some alternatives to paying for home renovations with a credit card?

Some homeowners may be eligible for home renovation financing through a special kind of FHA mortgage, called a 203K loan. These loans allow borrowers to finance the purchase and/or renovation of a home. It can be a great option for people buying fixer uppers or those who are ready to update their existing residence. Because the loans are backed by the FHA, they typically offer flexible credit requirements, low down payments and affordable interest rates. For homeowners who expect to need a longer time to repay their renovation costs, this loan could be a safer bet than relying on a credit card.

Another option for homeowners who have some equity built up in their home is a cash out refinance. By refinancing your existing mortgage and selecting a cash out option, you may be able to draw cash from your home’s equity to use however you wish, including paying for home remodeling projects.

Pros and Cons of Using Credit Cards for Remodeling Projects

To recap, here’s a quick look at the advantages and drawbacks of using plastic to pay for your home renovation projects:

Pros:

  • Possibility to take advantage of rewards (points, cash back, miles, etc.).
  • Possibility to take advantage of no-interest promotions.
  • May be a financially strategic move if you are able to repay the debt quickly.

Cons:

  • Higher interest rates preset higher risk of severe debt.
  • Temptation to over exhaust your budget.
  • More affordable options may be available, such as 203K loans or cash out refinancing.

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