Despite the fact that American homeowners hold more equity in their homes than ever before, a growing number are using credit cards for major renovations. This trend has financial experts scratching their heads as to why these homeowners are choosing to use credit cards in lieu of less risky options to pay for major home expenses.
According to a recent study done by home improvement website Houzz and Synchrony Financial, of the home renovations completed in 2017, over 36 percent of them were funded by credit cards. This figure has jumped over 25 percent from 2011 where 29.5 percent of home renovations were paid with a credit card. It appears as if this number is steadily increasing over the years.
In the survey, 85 percent of those who responded said that they utilized cash or savings to pay for their renovations, which is the ideal situation. However, 33 percent of them said they used credit cards to pay for the renovations, while only 15 percent of them used a home equity loan.
This new trend seems to be led by the millennial generation. These younger homeowners prefer to use credit in lieu of a long-term loan to pay for major expenses. Of the homeowners surveyed between the ages of 25 and 34 years old, 41 percent of them paid for home renovations with credit cards. Of the older demographic, specifically homeowners over the age of 55 years old, only 30 percent of them used credit cards for major renovations.
This younger generation of homeowners is more likely to pay off these expenses over the course of time. According to the survey, over 60 percent of those individuals intend to pay those credit card balances over the course of time. In fact, many of these homeowners make these large expenses by using a promotional card, many of which offer low or no interest for a specific period. If the homeowner can pay off the expenses within that period, they will not have to pay on any interest. The problem arises when the homeowner is not able to pay the balance before the promotional period expires. If that happens, he or she will be paying a large interest rate on the remaining balance. This possibility of incurring interest is additionally why many older homeowners prefer to pay for renovations with a home equity loan.
Another reason these younger homeowners are using a credit card for payment is the quick access they have to the funds. Applying for and being approved for a home equity loan can be a much longer process, and if the homeowner needs the money quickly, a credit card may seem like the better option. However, the consequences of using a credit must be weighed against the benefits before determining which option is best for you.
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