More Home Owners Are Using Credit Cards to Fund Renovations, but Should They?
According to a LightStream survey, around 59 percent of home owners plan to spend money on home renovations this year. In addition, around 42 percent of those home renovations are estimated to cost around $5,000 or more.
Yet, around 29 percent plan to pay with those renovations with a credit card as opposed to 7 percent who intend to take out a loan. Moreover, this survey has shown an increase in credit card use of four percentage points over the 2016 survey. Are credit cards really the answer?
photo Alina Ku-Ku via Shutterstock
Read on to learn more.
-
This is How Credit Cards Work
In terms of financing, credit cards are the most expensive option to use. The reason is interest rates can skyrocket to double digits unless you have a good enough credit score to get a 0 percent promotional offer.
Not to mention, you are required to make a minimum monthly payment of between 1 to 3 percent of the balance. Yet, if you don’t want to accrue interest, you must pay off the balance in full. In general, credit card is revolving debt.
The amount you have access to depends on how much you spend and how much you pay back. Furthermore, credit cards are not backed by collateral–meaning they are unsecured. This is why it is not the best idea to use a credit card for any except for daily expenses or monthly bills–things you can pay off by the due date.
In this regard, you can take advantage of any cash or travel rewards your card offers.
-
A Loan is the Better Option
According to Hearth, home improvement loans are a better option if you need to renovate right away. And, you don’t have to deal with sky high interest rates that go along with credit cards.
You could use cash, but it may take years or months just to save up enough money on the types of renovations your home needs. In the event of damages, you can’t afford to wait that long.
Plus, the right renovations often provide a good return on your initial investment.
-
Home Loan vs. Credit Card
If you were to compare the two, credit cards have much higher interest rates. If your renovation budget is larger than your cash flow, then it makes better economic sense to look at your loan options instead of plastic.
This is especially true if you have a low credit score; using a credit card can easily wreck your score if the interest rates are too high. On the other hand, if you have good credit personal loans often have lower interest rates than credit cards.
If you need longer-term financing, personal loans are the best option. This is because a personal loan is “installment” debt. You get all of the money at once and pay equal payments within two to five years.
-
Final Thought
If you are planning a renovation, it helps to know what kind of budget you can manage. If it is larger than your cash flow, then a home improvement loan will help to cut down on pesky interest rates.
Author: Carmleo Hannity
