Here’s how to decide whether it makes sense to pay for a home renovation by credit card, and some credit cards you should avoid entirely.
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With home prices rising across most of the United States, more homeowners are choosing to renovate their homes rather than move. Remodeling and renovating a home can be costly. Home Advisor estimates the cost of remodeling a bathroom at more than $9,700. Improving a kitchen might set you back as much as $22,000.
What you pay for materials and labor is just one part of the equation. Homeowners also have to consider the cost of getting their hands on the money. Depending on how you finance the renovation -- credit cards, home equity loans, personal loans, or by raiding your savings account -- how much you pay can vary wildly.
Below, I’ll walk you through how to decide how to pay for home renovations, and when it makes sense to pay by plastic.
Should you charge home renovations to your credit cards?
Using a credit card to pay for labor or materials to renovate your home can be the financially smart decision, but it all depends on some variables including the financing rate and how quickly you’ll pay off the balance.
Here are some scenarios in which it makes sense to pay by credit card:
- You can make use of a promotional APR. Competition is heating up in credit cards, and many cards are using 0% intro APRs for periods as long as 18 months to lure new cardholders. These 0% intro APR offers are a great way to break up a large purchase into smaller monthly payments. So long as you pay off the balance before the 0% intro APR expires, you won’t pay a dime in interest on your balance.
- You can earn rewards. Most credit cards offer 1%-2% cash back on purchases, but if you sign-up for a new credit card you may be able to get an even bigger payday. Many of the best sign-up bonuses offer qualifying cardholders up to $750 in cash or travel value for spending $500 to $5,000 in the first 90 days after signing up for the card. You could easily hit the minimum spending requirement for a sign-up bonus just by using the new card to pay for your home renovation. Putting your bathroom or kitchen remodeling costs on a top-tier travel card could quite literally earn you enough points or miles to go on a vacation while the work is getting done.
- You can pay it off in 30 days or so. One of the nice benefits of credit cards is that the bill for your purchases won’t be due for at least 30 days after your purchase. As I write this, I’m paying my credit card bill due on Dec. 9 for purchases I made from October 14 to November 10. Because of the way billing cycles and grace periods work on credit cards, all the purchases you make are effectively financed interest-free for 30 days or more, provided you always pay your statements in full. Let me repeat that: Credit cards offer at least 30 days of free financing, but only if you always pay the balance in full each month.
When it doesn’t make sense to use a credit card
There are some instances where using a credit card for a major purchase doesn’t make sense because it makes the purchase more expensive. Here are some circumstances where it would be better to pay in cash, or use an alternative source of financing for home renovations.
A potential pitfall of some credit cards and loans
Not all low-cost renovation financing plans are created equal. Be extra careful when navigating the fine print of loans or credit cards offered by home improvement stores, construction companies, and contractors.
When you see a 0% intro APR for a general purpose credit card (a card that can be used anywhere), it’s almost always a true 0% APR offer for the duration of the promotional period.
For example, let’s suppose that a card offers 0% intro APRs for nine months, after which it carries an 18% APR. We’ll assume that in January you charge $10,000 to the card for home improvements. After September, whatever remains on the card will start accruing interest. So, if you pay off all but $500, the $500 balance would start accruing interest in October. That’s relatively straightforward -- it’s how you’d expect a temporary 0% APR offer to work. You pay no interest for the first nine months, after which you pay interest on whatever balance remains.
Similar no-interest offers you find on store cards or “same as cash” financing offers work differently, however. Many no-interest financing offers pitched by construction and home improvement companies can charge what’s known as “retroactive interest” if you don’t pay off the balance in full by the end of the promotional period.
For example, let’s suppose that a card or loan offers no interest for nine months, but otherwise charges an APR of 18%. We’ll assume that in January you charge $10,000 to the card or loan for home improvements. When October rolls around, unless your balance is $0, you’ll be charged 18% annual interest on all of your monthly balances from January to September, which could add up to more than $1,000. You’ll also be charged interest on any balances you haven’t paid off going forward.
- You’ll pay an ordinary interest rate on the balance. If you plan to carry the balance on a credit card at a typical APR of 18% or more, forget about it. Paying down a $10,000 credit card balance over five years at an 18% APR would set you back more than $5,236 in interest. Unless your roof is leaking or you have smoke coming out of your fuse box, your renovations can probably wait. Start setting aside money in a high-interest savings account to pay for the renovation in cash. It doesn’t make sense to pay 50% more for a home renovation now if you can simply wait and save the money you need to do it.
- You can get a discount for paying in cash. Contractors and home improvement companies pay steep fees to accept credit cards, often 2% to 4% of the amount charged to a card. For this reason, many contractors will give you a cash discount for paying with cash, check, money order, or bank wire. If you can get a cash discount, it only makes sense to pay by credit card if the rewards you earn on the card exceed the discount. Don’t pay 3% more to use a credit card on which you earn 2% cash back, for example.
- You have other financing options. Outside of promotional 0% APRs, credit cards are almost always the most expensive way to borrow. Creditworthy homeowners would likely find that they can get a personal loan at a lower interest rate than a credit card, and benefit from repayment terms that are as long as six years. Likewise, a home equity line of credit can be a great way to finance a renovation, since the interest rates are usually super-low (just slightly above mortgage rates) and the interest can be tax deductible, unlike credit card or personal loan interest.
Yes, even if you pay down $9,999 of your $10,000 balance during the promotional period, you could be charged interest on all of your balances retroactively. The only way to avoid paying interest with these “no interest” offers is to pay your balance all the way down to $0 by the end of the promotional period.
This is the key difference between true 0% intro APRs offered by general purpose credit cards, and “no-interest,” “deferred interest,” or “same as cash” financing offered by store credit cards and loans pitched by retail stores, contractors, and construction companies. (All of the cards on our list of the best 0% APR cards are true 0% APR cards that do not charge retroactive interest.)
The fine print of “no interest” offers has come under a lot of scrutiny. Through the Consumer Financial Protection Bureau, the federal government has taken aim at companies that offer them, issuing warnings to companies that do. Unfortunately, those warnings have done little to curtail companies from pitching these deals to unsuspecting customers who think that “no-interest” is the same as a “0% intro APR.” It isn’t the same -- not at all!
Unless you are absolutely, 100% sure that you can pay off the balance during the deferred interest period, you should never use a “no-interest” financing option. A true 0% APR credit card would be a much better choice, since you won’t be penalized with retroactive interest on your balances if you do not pay it in full by the end of the promo period.
The bottom line: Select a financing option with all the care that you would take in picking a contractor to work on your home. Read the fine print carefully, and never assume that “no interest” or “same as cash” means the same thing as a “0% intro APR.”
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