Using this Funding Strategy for Home Renovations can Seriously Cost You

Advisor August 27, 2019

When it comes to home remodelling projects, plastic is truly fantastic. No, we’re not talking about using plastic as a design element, but actually as a way to fund the renovation. How? Keep reading to find out.

According to a study one in three homeowners are using credit card to fund their renovation projects in part or entirely

Credit Card Spending on the Rise

According to a joint study by Synchrony, a financial services company, and Houzz, a home remodelling and design platform, one in three homeowners are using credit card to fund their renovation projects in part or entirely.

According to the data, homeowners spend an average of $10,000 on renovations, but only use their credit cards to pay between $1,500 and $4,800 of that amount. Only 5 per cent of the credit card spenders put their entire remodelling tab on plastic.

The report drew from data collected by Synchrony in its Houzz & Home Study in spring, along with credit card usage figures from information and advisory firm, Argus to analyse the spending habits of over 72,000 homeowners who used credit cards to pay for home renovation projects last year.

According to the report, almost all homeowners relied on plastic to fund the projects, whereas 10,602 of the participants used more than one credit cards to spread out their balance.

The researching companies analysed the spending trend among homeowners to infer that Americans spent over $141 billion in 2017 on renovation projects (including remodelling products and services), up by 13 per cent from previous year.

The growing renovation trend was in line with an increase in credit card spending in 2017, and Houzz’s principal economist, Nino Sitchnava, says that putting the remodelling tab on plastic could actually be a smart move.

Using Credit to Earn Rewards

Most homeowners are being smart about their credit card spending, with one in four saying that the main reason they use plastic to pay for remodelling projects is to earn rewards on their cards, while almost 60 per cent said that that they used the zero-interest promotion to fund the remodelling expenses, which is a smart move considering how high interest rates can go on credit card debt.

44 per cent of the homeowners said that they had compared several lending options and found credit to be the least costly in terms of interest.

Nino added that a typical homeowner puts 25 per cents of the renovations expense on their credit card while most are using other financial avenues to fund their remodelling projects. The study also shows that millennials are more likely to use their credit card for funding expenses like renovations than the previous generations.

Only 34 per cent of the homeowners between the age of 35 and 54 used credit for home remodelling purposes in comparison to 41 per cent of millennials (aged between 22 and 35).

The biggest reason why so many millennials are dependent on credit cards is because they have limited financing options, because of budget constraints, lower income and mounting student loan debt. In addition, most of the homeowners from the younger generation have bought their property only recently and don’t have enough equity in their homes to use as a basis to get additional loan.

Over 41 per cent of the homeowners who put the remodelling cost on credit cards, paid off the balance with standard credit card interest rates instead of zero-interest promotions.

When It Can Cost You

Founder of RLB Wealth Planning and certified financial planner, Richard Bergen, says that using credit card to fund renovation projects is a good idea if homeowners already have the cash to pay back the bill quickly and take advantage of rewards and perks. But if you’re paying for an expense with money that you don’t really have, it’s better to explore other financial avenues that offer better loan terms and lower interest rates.

In the report, Houzz wrote that over 41 per cent of the homeowners who put the remodelling cost on credit cards, paid off the balance with standard credit card interest rates instead of zero-interest promotions.

Bergen says that taking out credit card loans is generally a bad financial decision since APR on most credit cards clocks in at 17.07 per cent, whereas store-specific cards have an average interest rate of around 25 per cent.

But whether you’re putting the renovation tab on your credit card to earn rewards or spread out the bill over monthly payments, it’s important to create a feasible budget for the project and make sure that you don’t go overboard with the spending.