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by Jordan Wathen | Updated Aug. 12, 2021 - First published on May 15, 2019
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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.Image source: Getty Images.
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.
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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:
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.
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% intro 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% intro 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.
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% intro APR cards are true 0% intro 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% intro 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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