Is it better to empty out your savings account to pay for a home improvement project, or take on additional debt? How will this affect your credit? Money Girl's answer may surprise you.
by Laura Adams
A Money Girl podcast listener named Michael W. asks:
“I need to make a home improvement that will cost about $4,000. I have the cash, but spending it would empty my savings. Instead, should I finance it with a 12-month, 0% interest credit card—and how would that affect my credit?”
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One of the first rules of personal finance is to always keep a cash cushion in the bank—because you never know when you might need to land on it. Losing a job, needing an expensive car repair, or having unexpected medical bills are just a few reasons why you should never go without an emergency fund.
I recommend that you maintain at least 3 to 6 months’ worth of living expenses in an FDIC-insured bank account. Michael didn’t give specifics about his monthly expenses, but I’ll bet he needs to keep more than $4,000 in the bank for a healthy emergency fund.
Therefore, Michael shouldn’t drain his bank account to pay for home repairs—unless they’re critical for his safety or are necessary to prevent his home from sustaining additional damage (such as repairing air conditioning or a roof leak).
If Michael can charge repairs on a 12-month, no interest credit card and pay off 1/12 of the balance each month, he could finance his home improvements for free! The only danger is if he doesn’t pay off the balance in full and the card charges him a high interest rate after the promotional period expires.
Another option to finance home improvements, that could be less expensive than using a credit card, is a home equity line of credit (HELOC) or a home equity loan. Interest on these types of accounts is low and may also be tax-deductible. However, Michael would be required to have a certain amount of equity in his home to be approved for a HELOC or equity loan.
Applying for a new credit card or loan typically causes a temporary, slight dip in credit scores. However, using credit responsibly—by making on-time payments and never maxing out credit accounts—is the best way to raise your credit scores over the long term.
Other Articles and Resources You Might Like:
Best Tips to Improve Your Credit Score
7 Steps to Check and Correct Your Credit Report
Get Your Free Credit Score (Without Hurting Your Credit)
9 Things That Can’t Hurt Your Credit Scores
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Doing Home Improvement photo from Shutterstock