How would you finance a home improvement project? If it's beyond what you can pay for in cash, you might consider using a credit card instead of a home equity loan or line of credit.
According to a new survey from Houzz, one-third of Americans paid for at least part of their home renovations with plastic. Only 5% used credit cards alone, with 6% using plastic to supplement loans, and the remaining 21% using a combination of cash and credit. The median credit card user spent $10,000 on renovations in 2017, with $1,500 to $4,800 of that spending applied to credit cards.
Homeowners using credit for improvement projects frequently look for promotional credit card offers. If you want more credit, check out our list of credit card offers. Survey respondents who planned to pay off their card balances over time chose promotional cards by a three-to-one ratio.
Between 69% and 72% of credit-card-funded renovations below $15,000 took advantage of promotional interest rates. Lower interest rates become even more important for renovations above $15,000, where promotional interest rate cards made up 77% to 79% of the funding.
Store-specific cards are more likely to offer promotional interest rates than unrestricted cards (89% of store cards versus 59% of unrestricted cards). However, unrestricted cards remain more popular for home improvement projects by a two-to-one margin (26% to 13%).
That may be because store-specific cards often carry higher interest rates. According to a separate survey by CompareCards.com, store cards carry an average APR near 25%. The current average APR for all credit cards is approximately 17%.
For respondents who planned to pay off a credit card balance over time, 72% of those using store-specific cards planned payoff periods of six months or greater, compared to only 45% of those using unrestricted cards. Before using a store card to finance your project, carefully review the terms and conditions – as well as your expected payoff period – to make sure you'll come out ahead.
Most survey respondents using credit cards (62%) planned to carry balances and pay them off over time. Almost half of older homeowners (age 55 and above) expect to carry balances, compared to 60%-65% of younger homeowners.
As anticipated, renovators who expect to carry balances tend to charge more to their cards. Balance holders charged a median value between $2,000 and $4,900 on their project, while the median charge for renovators not carrying balances was between $1,000 and $3,600. However, larger projects ($25,000 or above) had a lower share of financing via credit card – probably because few cardholders have credit limits that can handle such a large expense.
Among renovators in the survey, cash is still king. A majority (54%) paid for their renovations with cash or other personal finances. The majority who chose cash for their projects over credit cards simply preferred cash (55%) – although another 27% considered credit cards too costly.
What's the best method to finance your home improvement project? It could be credit cards, cash, loans, or any combination of those methods.
Plan out your project thoroughly and realistically to get an accurate cost assessment. Avoid making optimistic assumptions just to make a project feasible. Also, beware of mission creep ("As long as we're renovating the bathroom, why don't we renovate the entire second floor?").
Compare borrowing costs for a loan with the extra interest you'll pay on a credit card balance. Online spreadsheets are available to help you run scenarios based on your cash flow.
Planning and research are the keys to successful home improvement. Don't let a bad financing choice put you in a bind. (There are also unreliable contractors, but that's another story.)
Your credit score will also determine the interest rates you pay on loans and credit cards. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.