Read This Before Putting that Home Renovation on Your Credit Card

Apr 15, 2019

Renovation Credit

If you plan to use a credit card for renovations, you’re not alone. According to a study by online home decorating community Houzz, one in three homeowners uses credit cards for home improvement. 

While credit cards make large home purchases seem more feasible in the short term, in the long run, they can be a really expensive way to spend money. Still, sometimes they make more sense or are your only option.

The key is understanding why you want to renovate. Let's look at the two most common reasons for updating your home – renovating to increase your home’s value and renovating to make your home more livable – and when using a credit card might work for both.

Renovating to Increase a Home’s Value

If you’re trying to increase your home's value before you sell, it’s a good idea to see what’s popular on the housing market. Maybe you want to add a deck because decks are all the rage in your neighborhood, or maybe your kitchen needs some modernizing because you bought your house a decade ago.

To make the best decision on which upgrades to pursue, talk to your realtor and find out what will help you sell your house at the best possible price. That way you can make the smartest decision on which renovations to prioritize, how much you spend, and how you pay for them.

You should also understand how much your home’s value will appreciate on its own based on the housing market. Right now, homes appreciate at an annual rate of about 6 percent. Your real estate agent can help you find out how much your upgrades will cost relative to how much they’ll increase your home’s worth.

If your improvements cost less than the total price increase of your home, it might make sense to use credit if you don’t have the cash upfront. Assuming everything goes to plan, you’ll be able to pay off your credit card when you sell your home.

Keep in mind, though, some renovations will actually make your home more difficult to sell, including:

  • Carpeting, which is less desirable than laminate or hardwood and shows signs of damage easily.
  • Textured walls, popcorn ceilings, and wallpaper – they’re a pain for buyers to remove.
  • Ornate light fixtures and decorations that make your home look dated.
Talk to your realtor to find out what renovations will help you sell your house at the best possible price.
Renovation Credit 3

Renovating to Increase a Home’s Livability

If you’re upgrading your home to make it more livable, the renovations are probably necessities. Things like updating your plumbing or adding accessibility features like ramps make your home safer and more convenient.

For renovations that can’t wait, a credit card may be your only option. The problem, of course, is if that if you don’t have the cash up front, you could end up paying a hefty interest rate, which will increase the cost of your renovation.

Houzz reports that 62 percent of credit card users intend to eliminate their balance over time. If you don’t want to end up with a huge debt you can’t handle, “eventually” won’t cut it for how you plan to pay off your card. If you intend to stay in your home after renovating, be sure to map out how you want clear any credit card charges as quickly as possible.

Two things to keep in mind:

  1. If you can pay the balance off within three to six months, a credit card may make sense, especially if it offers benefits like extra points, cash back, or miles. But always calculate any interest you’ll end up paying to make sure the benefits you get equal or exceed the interest you pay.
  2. A credit card might be cost-effective if you have a card with a promotional rate (e.g., zero percent interest for 12 months). You could conceivably charge the purchase and pay it off within the year without paying any interest.

But having a payment plan is hugely important: as soon as the promotional rate expires, you’ll be paying interest (average interest rates right now are north of 16 percent).

Credit card interest rates are currently 16 percent on average.
Renovation Credit 2

Other Financial Considerations for a Renovation

One final thought: while credit card debt is a financial liability when you’re updating your home, it’s far from the only one. Here are two more things to keep in mind:

  • Check your contractors’ insurance: Make sure your contractors have general liability coverage so you’re covered if their work damages your property and workers’ compensation so they’ve got access to funds to pay for any injuries they incur while doing the work.
  • Include your new home additions in your insurance policy: Your homeowner's insurance is based on the value of your house and its contents. A major renovation could change the kind and level of coverage you need, so be sure to check with your agent about whether you need an update. (Tip: not all renovations lead to higher insurance rates; some, like stronger roofs, can actually bring your premiums down!)

Bottom line: renovations are a big deal. Before making any major decisions, be sure to weigh the financial ramifications so you’re confident that any updates you decide to go for make sense for the long term.