Since the start of the pandemic, many people have been spending more time working from home. In fact, some people have plans to work from home permanently. That, in turn, has helped fuel an interest in renovations.
In a recent LightStream survey, 44% of homeowners say they want to renovate this year. But 35% say they intend to use a credit card to pay for renovations. That could be a potentially dangerous move.
The problem with credit card balances
It’s one thing to charge the cost of a home renovation on a credit card and pay it off right away. Doing so could actually be a smart move, because it might score you a nice amount of cash back or rewards points.
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But charging home improvements on a credit card and paying that balance off over time isn’t such a great decision. Credit cards are notorious for charging hefty amounts of interest on balances that are carried forward. All told, your renovation could end up costing you a lot more money than anticipated if you use a credit card to pay for it.
Plus, too high a credit card balance could actually cause a drop in your credit score. Once that happens, borrowing could become more expensive the next time a need arises.
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A better way to finance home renovations
If you’re looking to spruce up your living space and can’t pay for the work outright with cash or savings, then it pays to explore different renovation financing options before reaching for a credit card. First, you can look at taking out a personal loan, which lets you borrow money for any reason. Personal loans tend to charge considerably less interest than credit cards. And they’re a good bet if you’re an applicant with a strong credit score.
Another option, if you have a decent amount of home equity, is to borrow against it via a home equity loan or line of credit. Both options tend to come with affordable interest rates, though they’re a bit different. With a home equity loan, you borrow a lump sum like you would with a personal loan and pay it off in equal installations over time. With a home equity line of credit, or HELOC, you get access to a credit line you can draw from over time – usually lasting five to 10 years.
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If you’re not sure what you’ll end up spending to renovate, a HELOC could be a good bet, as it gives you the flexibility to start off borrowing less and increase that amount as needed. But when you take out a HELOC, you’ll usually be hit with a variable interest rate on the sum you borrow. This means your payments may not be as predictable as they would be with a home equity loan.
Either way, it pays to explore different borrowing solutions before falling back on a credit card to finance your home improvements. Doing so could save you a fair amount of money, not to mention prevent your credit score from taking a hit.
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