Cassie Sousa, 28, a teacher in San Antonio, has been dreaming for months of updating her kitchen, especially the wooden worktops. “My house is from the 1980s, so there’s a lot of wood,” she says.
She plans to replace the counters, appliances, sink and cabinets for a more modern and lighter look, including white cabinets. “I’m so excited to have the new kitchen that I’ve customized to my liking,” Sousa says.
Paying for the remodel, however, isn’t as simple as choosing the color of the cabinets. After getting a quote for about $8,000 from a contractor, she knew she didn’t have enough savings money to fund the project, so she started looking for loans. “I want to avoid paying as much interest as possible,” Sousa says. While reviewing credit card options, she worried about the going annual percentage rate and the total interest she would end up paying.
Credit cards can be an expensive way to borrow money, but they’re also a popular choice for many homeowners in Sousa’s position. LightStream, the online lending division of SunTrust Bank, found in a survey of more than 3,000 adults that 29% of those planning home improvement projects this year intend to pay for them with credit cards . This compares to 60% using savings and 9% using a home equity line of credit.
HELOC and home equity loans are definitely options worth exploring. But if you’re considering charging a credit card for a home improvement, here are some things to consider first.
Keep rewards in context
If you put $10,000 in renovations on a credit card that earns a 2% reward rate, you will have effectively recouped $200. But unless you repay these charges in full at the time of the bill, you will pay interest. That interest could easily add up to more – much more – than $200.
Moreover, while DIY stores and other retailers accept credit cards, many entrepreneurs do not. And those that accept plastic often impose a surcharge on credit card transactions that will usually eat into the value of your cash back or points you earn.
So keep the rewards aspect in context. If you have the cash to pay the fee right away, and if putting the fee on a card won’t cost more, then go ahead and grab those rewards. Otherwise, consider a different approach.
Look for a card with 0% APR
A credit card that charges 0% interest for a certain period of time allows you to spread the big expenses of a home remodel over multiple payments, to avoid hitting your budget with the cost all at once. Additionally, some of these cards come with reward points and other benefits such as purchase protection. If you know you’ll pay off the card balance before the introductory 0% APR offer ends, you can enjoy all the benefits without paying interest or fees.
“If you pay it off before you get hit with interest, then borrowing at 0% is fantastic,” says Andrew Damcevski, financial planner and co-founder of RhineVest, a Cincinnati-based financial planning firm.
Some contractors may charge additional fees for credit card payments. If so, you need to ensure that the charges do not outweigh any benefits you may derive from using the card.
Pay it before the end of the promotional period
Credit cards tend to come with interest rates of around 15% or more after the introductory period of 0% APR ends. It can add up quickly.
“High interest rates are the biggest red flag when it comes to using credit cards, and the interest on a card is also not tax deductible,” Damcevski says, at the like mortgage interest.
That was what Sousa was concerned about using a credit card to fund his kitchen renovation. “I considered a credit card with an introductory rate of 0%, but paying it off within a year or a year and a half was probably not going to happen,” she says.
She knew that the interest rate would probably increase after that time and she didn’t want to incur interest and fees.
Redeem Reward Points for Home-Related Items
Sarah Fogle, creator of Ugly Duckling House, a home improvement website, says she often uses rewards points from her credit card spending to buy smaller items for her home. She redeems her rewards points for gift cards at local home improvement stores, such as Home Depot or Lowe’s.
“I go through gift cards pretty quickly,” she says.
She also takes care to pay off her balance each month to avoid interest.
Know the discounts, disadvantages of store-specific cards
Store brand credit cards come in many forms, so review the details to determine if the card is right for you. Damcevski recommends asking yourself how often you shop at the store, whether you’ll pay the balance monthly to avoid interest, and what, if any, discounts the card gives you.
A cash back credit card that you can use at any store often offers more rewards flexibility and may also come with a lower interest rate and higher credit limit.
Home deposit, for example, offers a store credit card with six months of deferred interest on purchases of $299 and more, with occasional special offers but no ongoing rewards. The Lowe’s Advantage Card offers 5% off purchases as well as a similar deferred interest option on purchases of $299 and more if you waive the 5% discount.
Deferred interest, however, is not the same as 0% APR. Unlike the latter offer, if you haven’t paid off your balance at the end of a deferred interest period, you will owe all interest that has accrued throughout that period. And it can be a lot.
Pay with savings to avoid interest
You can’t pick up rewards points by paying your entire home improvement bill with cash savings. But on the other hand, you never have to worry about interest.
“In a perfect world, we’d like to see our clients create a home improvement savings goal and save monthly for it,” Damcevski says, so they can completely avoid the risk of paying interest on a credit card. Since homeowners are often faced with unexpected improvement costs, such as repairing a leaky roof, he recommends having an emergency fund to cover these types of expenses and avoid accumulating losses. additional credit card debt.
Sousa is considering using a home equity loan instead of a credit card for her kitchen renovation because it has a lower long-term interest rate, but she hasn’t made a final decision yet. . A hailstorm that damaged the solar panels in her house has delayed the start date of her project, which she hopes to start within the year.
An advantage to expect? “I would have a few thousand dollars more in the bank,” she says, “so I will have to withdraw less.”