With 72% of American homeowners choosing to renovate their homes within the next six months, many may be looking for ways to maximize their renovation spending. A recent report by NerdWallet specifically found that Americans are financing these renovations through savings, cash-out refinancing, personal and home equity loans, and credit cards.
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When utilized correctly, using credit cards for a renovation is a great way to make your money work for you and get some pretty cool perks. Today's credit cards offer rewards like cash back, early access to live events, access to exclusive airport lounges, and points for hotel stays and plane tickets.
Curious about how it all works, we asked the experts how homeowners can responsibly use credit cards to pay for their renovations while earning major rewards at the same time.
Figure Out What Can (and Cannot) Be Charged on a Credit Card
Last year, Bankrate discovered that 57% of homeowners were planning on paying for their renovations with credit cards. If you decide to use credit cards for your renovation, the first thing you'll want to do is figure what can and cannot be charged. One of the biggest costs of a renovation is labor, but keep in mind that most contractors don't take credit cards as payment — they usually take cash, checks, or wire transfers.
Some renovation items that can be charged on a credit card are major appliances, cabinets, or flooring, and these significant purchases can lead to more rewards. Most credit cards have an introductory sign-up period in which a certain amount has to be spent to qualify for rewards, which can range from $500 to $5,000. If you're trying to earn rewards quickly, it won't be hard to hit the introductory amount with the purchase of more expensive home furnishings.
"Appliances are obvious home expenditures that can be purchased with a credit card not only because you could earn rewards on those purchases, but because many credit cards offer perks like return protections for purchases made," Nathan Grant, a senior credit card analyst at Credit Card Insider, tells Hunker.
Credit Card Insider recommends these four credit cards that offer return protection, and the site also has a guide for each major credit card company's return protection policy. Return protection means that if an item breaks from normal use outside of the store's return window, users can file a claim with their credit card company. After providing a store receipt, credit card statement, and proof that the store won't take the return, the purchase could be eligible for a full refund.
Personal finance blogger Brian Jung regularly dispenses credit card advice to over 800,000 subscribers on his YouTube channel. He was also featured in the Netflix special Money, Explained. When it comes to using credit cards for major purchases, Jung tells Hunker that this should be done strategically, with a plan to pay off balances at the end of the month.
"Nowadays, you can pretty much buy anything on your credit card, especially if you are buying from a retail store. Make sure you have a large enough credit limit for that purchase, and I always recommend making sure you can pay it off in full unless you are utilizing a 0% APR promotion — [in other words, no interest payments need to be made] — on that card. Credit cards can help big time with cash flow, but if you are making purchases that you can't afford, then the interest you pay is never worth it," Jung says.
Consider a Store-Brand Credit Card
Most credit card experts warn against getting store-branded credit cards because of the high interest rates, but getting a credit card at a home improvement store may make sense if the interest rates are low. If you're going to be making a lot of purchases from one store, and you can avoid paying interest and get perks like discounted delivery or daily deals, you'll want to consider using a store card.
Jung tells Hunker, "I have a friend who recently signed up for the Lowe's credit card with 0% APR. I usually don't recommend in-store credit cards, since you can find yourself earning much better rewards with major issuers, but the no-interest promotions on larger ticket items for home renovations [like flooring and appliances] sometimes make a lot of sense."
Apply for a Credit Card at the Right Time
There's definitely a system for earning credit card rewards, and one of them is timing applications. If you're trying to qualify for a mortgage, Jung advises holding off applying to new credit cards because the companies will do a hard inquiry on your credit score. A hard inquiry happens when a company checks your credit score for a mortgage loan, auto loan, or credit card application. On the other hand, soft inquiries happen when you check your own credit or when a credit check is part of a background check. While a soft inquiry may show up on your credit report, it won't lower your credit score; however, too many hard inquiries could negatively affect your score.
If you're not in the process of applying for a home loan, Jung says you'll also want to wait until you're closer to making a big purchase to apply for a card. Since most cards have a minimum purchase amount that has to be met within the first three to six months, in order to earn those promotional points or rewards, a big purchase can easily help you meet that demand.
Figure Out Which Card Is Right for You
Are you saving up for that dream trip to Hawaii? Or, do you just want to put money back into your pocket? Whatever your goals are, search for cards that will offer the best rewards for your lifestyle.
"First, find credit cards with the best sign-up bonuses right now and get that card before making your larger purchase. Once you have those points, you can cash it out or use it towards travel in the future, and essentially find yourself getting a discount of at least 20% on your current purchase, due to the reward rates that current card issuers are offering," Jung says. "Just as an example, if you spend $5,000 and get $1,000 back in credit card rewards, you're still getting free money, all while maximizing these free benefits available to everyone right now."
Know Your Limits
If you're already carrying debt and don't have a lot of cash reserves, adding more credit card debt may not be the best option. The last thing you want to do during an already stressful renovation is add the stress of managing excessive credit card debt. For many homeowners, though, taking advantage of promotional offers while they are already making big purchases could pay for that next vacation or put money back into their wallets.
Grant advises, "Ideally, you want to avoid carrying a credit card balance month to month, to avoid interest and damage to your credit scores. So, even if you are looking for some rewards or flexibility with your spending, remember to pay the full statement balance each month; or, if you use a 0% APR card, pay off the full balance by the end of the offer period. While you should never apply for a credit card for fun, if you have expensive purchases on the horizon, a sign-up bonus can be a great way to get a significant discount."