Reno Tips: Beware Paying on Credit
Reno Tips: Beware Paying on Credit
A renovation can be a costly endeavour and, if you don’t have the cash saved up to cover it, you’ll have to look at financing options to fund your project. You need to be very careful, or you may find yourself house poor.
Store Credit Card and Financing Programs
Most large stores have in-house financing available with features designed to entice you to use their credit. One popular option is delayed payment, often for up to one year, with no interest charged on your purchases during that time. But, take my advice – you must read the fine print. If you don’t have the money to pay in full after the interest-free term, interest is often charged back to the day of the purchase, at rates far exceeding regular credit card or loan rates. Many interest rates are in the 30% range.
Let’s say that you spend $10,000 on a store credit card with a 28% interest rate. You would need to make payments of $500 per month in order to have the debt paid off in 28 months (just over two years). Have you done the math? You will be paying over $3,600 in interest over that time. So that $10,000 purchase will actually cost you $13,600 – 36% more than the original sticker price! If you can’t afford to make that $500 per month payment, it gets even more expensive. If the minimum required payment is 3% of the card balance each month and that’s all you can afford to pay, it will take you about 48 years to pay off the balance – and you will have paid over $34,000 in interest. Scary.
The safest way to use this option is if a) there are no initial set -up fees charged by the store, and most importantly b) you have the cash in your bank account to pay the balance. Then, you can put the money you have saved into a high interest savings account, or low risk investment for the year. You will then pay the card off in full before payment is due. You will earn interest on your funds and improve your credit rating!
Traditional Credit Cards
Traditional credit cards like Visa and MasterCard are well known and used. Whether or not they make sense to fund a large purchase really depends on a number of factors. The positives are that they make purchasing easy, they can help you manage your cash flow, and many offer perks like points towards free gifts or even cash dividends.
Credit cards can also be very dangerous. The interest rates charged can vary widely, so know what you will have to pay, before charging away! Many have rates of up to 20%, and you may find yourself having trouble making payments as the interest continues to increase.
High interest credit cards should never be used to make any purchases that may take you a long time to pay back. For example, even $2,000 put on a credit card would take you about 14 years to pay back at 18% interest if you only made a 3% minimum payment per month. In fact, the interest paid would end up costing almost as much as the original purchase! For this reason, credit cards are best used when they offer you some type of financial advantage, like perks, and most importantly, you pay them off promptly each month.
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