Can you renovate a house using a credit card or credit card loan? This is a very good question many homeowners face when it comes to home renovations.
Why would you apply for a renovation loan if you have enough credit limit that can solve the problem? Should you use your credit cards to take care of this problem? Before, you go ahead and swipe all your cards, consider reading this article first. You must understand how credit cards work and how credit card debts differ from other debts.
In this article, we will discuss the idea of renovating your home using credit cards instead of regular loans.
First of all, what is a credit card?
A credit card is a card that you get from a financial institution that allows you to spend money on goods and services. The money you used must be paid off within a payment period, usually once a month. Each credit card comes with a limited amount (credit limit) you can spend. Your credit limit can be increased if your credit utilization satisfies your card provider. Once you have used all your credit limit, you must pay off some of it, in order to continue using the card.
In return, you will pay interest on the outstanding balance known as the annual percentage rate(APR). Fees and charges are applied depending on how you use your cards and they vary from one card provider to another. For example, you will pay fees on late payments and cash advance.
If you don’t have a credit card or want to get one, read the following article. It will tell you what to expect about credit cards
Related: 9 Things to know before getting a credit card
Can you pay for home improvements with a credit card?
Is it a good idea to use credit cards on home improvement projects? The answer to this question is: not a good idea. You will learn more about this answer later in this article.
Your credit card limit can help you renovate your house. However, there are two factors that will influence this decision.
- The cost of your renovation: How big is your renovation and how expensive is it going to be? If your renovation will cost thousands of dollars, you must think twice before you swipe your credit cards. You should never use your credit cards on expensive purchases or projects such as house renovations.
- Your credit limit: The money your lender allows you to spend on the card(s) will affect your decision. That is if you have a $1,000 total credit limit on your credit cards and your renovation will cost $10,000, it would make sense to apply for a loan instead.
Can you renovate a house using a credit card?
As we have seen above, there are two factors (credit limit and cost of renovation) that will influence your decision.
- If your renovation is too expensive compared to your credit limit, consider getting a home renovation loan instead.
- On the other hand, if you just need to make minor changes to the house that will cost less money compared to your credit limit; using a credit card could make more sense. For example, it would make sense to purchase paint, related equipment, and pay contractors if all these expenses will not cost more than 30% of your credit limit. This will enable you to pay it off easily and faster. In addition, your credit score will not be affected very much.
Why is it a bad idea to renovate a house using a credit card
When it comes to credit cards, you should always be careful about what you do with them. Your credit utilization and payment behaviors will greatly affect your finances.
The following are reasons you should avoid using your credit cards on expensive home improvement projects.
- Your credit utilization will go up fast: Your credit utilization is how much you have spent on your credit cards compared to your credit limit. A high credit utilization will negatively impact your credit score. As noted by Experian, you should always keep your credit utilization under 30%. The lower the better. If your renovation is too expensive compared to your credit limit, you could end up racking up a huge credit card debt. By default, the more credit card debts you have, the harder it is to pay them off.
- Credit card debts are difficult to pay off due to a high APR: Earlier in the post, I mentioned that you will pay an APR on the outstanding balance. This is true and credit cards have the highest interest rate in the lending industry. According to the Federal Reserve, the average credit card rate is 14.65%. This rate keeps going up. What does this number mean? It means that you will pay 14.65% expressed as a yearly percentage on your credit card outstanding balance. Keep in mind that this interest is compounded. Compound interest means that the unpaid interest will be added to your principal amount. This will increase your debt exponentially. Hence, making it difficult to pay it off. Unless your card has a 0% APR and you will be to pay it off before the promotional period ends, you should avoid such a transaction on your credit card.
What else that can go wrong?
- A negative impact on your credit score: Your credit score is a three-digit number that ranges from 300-850. The higher your score is the better. Your credit score is very sensitive as it is affected by every financial decision you make. That is how much you use, your payment history, foreclosure, etc. will all affect your credit score. By using your credit cards to renovate a house, you will accumulate a large credit card debt. A large credit card debt will reduce your credit score significantly. With a bad credit score, it will be difficult for your to qualify for more loans in the future, and if you do, you will pay a large interest.
- Paving your way to bankruptcy and financial disaster: Earlier, I mentioned that credit card interest rates are compounded which means that your debt will continue to grow if not paid off fast. Thousands of people struggle with this concept and they learn the hard way. The more credit card debt you accumulate, the higher the chances you could go bankrupt or put yourself in severe financial distress.
Alternative to credit cards and credit card loans
At this point, we have shown that it is never a good idea to renovate a house using credit card loans. What can you use instead of these loans?
The following are alternatives to credit card loans you can consider to renovate your house.
- Home equity line of credit (HELOC): If you want to renovate a house, you probably owned it for a while. Owning a house for a while means that you have made a lot of mortgage payments, and therefore, built equity in the house. If this is the case, you can take advantage of HELOC. With a HELOC, the lender will give you money and use the equity you have built in your house as collateral.
- Other home improvement loans: Instead of using your credit cards to renovate a house, consider getting a different loan. Although you will go through a lot of processes and paperwork, the loan will come with a much lower interest rate. This will make it easy to pay it off. In addition, you will have much more time to make your payments. Some credit card companies offer home improvement loans to their customers. Consider these loans only if they work in your favor. For example, if you are planning to receive a large payment that will pay off the debt you accumulated before the due date, it would make sense to use your credit limit or credit card loans.
