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Scenario

  • I have very good credit
  • I have a credit card that gives 2% cash-back on almost all purchases
  • I do not carry a credit card balance month to month
  • I have to make emergency home renovations and will need to borrow about $12,000
  • My credit limit is much greater than $12,000
  • I'm able to quickly get a personal loan for $12,000 around 7% APR (Much lower than Credit Card interest)

Plan

  1. Get the $12,000 personal loan
  2. Pay for all renovations on my 2% cash back credit card
  3. Use the loan to pay off the credit card balance.
  4. I just saved $240

Question Is there any reason I shouldn't do this vs just paying for the renovations directly with the loan? I called the company that will give me the loan and they said once I receive the cash from the loan I can use it for whatever I want. (except crimes)

*** UPDATE ***

I ended up doing this. Turns out that, at least in my area, many contractors waive credit card fees in order to stay competitive. I was able to get hundreds of dollars cash-back by putting it all on the credit card, then immediately paying off the card with my personal loan.

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  • You do remember that you have to make monthly payments on the personal loan too, don't you? Is your cash flow such that you can accommodate those easily? Commented Oct 17, 2021 at 14:06
  • 2
    Does the contractor you will use for the renovations accept credit card payments? At least where I am (UK), many or even most don't.
    – Vicky
    Commented Oct 17, 2021 at 15:30
  • @DilipSarwate Yes, I understand that I have to make monthly payments on a personal loan. The question was more about whether there is a downside of using the credit card as pass-through to get the 2% back.
    – cyclobster
    Commented Oct 17, 2021 at 15:37
  • @Vicky I'm in the US. From quotes I've gotten from contractors so far they do accept credit cards.
    – cyclobster
    Commented Oct 17, 2021 at 15:38

3 Answers 3

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The credit card company will charge your contractor a processing fee for accepting the credit card. In my experience most contractors will simply pass that feel along to the customer. The last time I did this the contractor added a 3% credit card fee to the bill. This may negate the benefit of your plan.

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  • 2
    Cool, so the pitfall I'm seeing is confirm whether the contractor accepts credit cards and what fees they may apply
    – cyclobster
    Commented Oct 17, 2021 at 17:07
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    This is key, find out if they charge extra for paying with a card (or offer a cash discount) before deciding. If it's not cheaper to pay with cash then the extra for credit card processing is baked in (like every retailer) so you lose money if you don't use a rewards credit card.
    – Hart CO
    Commented Oct 17, 2021 at 23:21
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    IF they don't add on a fee - ask if you can have a 2% discount for paying "cash" (which you'll pay for with the loan proceeds). You'll still "save" $240.
    – D Stanley
    Commented Oct 18, 2021 at 13:20
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There are pluses and minuses with your plan. You will have to determine what works best for you.

  1. Some contractors will give a discount for cash. Meaning they want you to write them a check instead of using their financing arm or using your credit card. That discount or fee could be in the same range as the cashback from the credit card.

  2. Some will give a price break even if you use a credit card, they just don't want you to spread the payments out over months. My HVAC contractor did this a few years ago. I got 3% from the credit card company even though I could have written a check on the day the HVAC was installed. Plus the contractor gave me the cash discount.

  3. Timing. How long will it take to get the signature loan. If you get it before the work is done then you will start paying interest before the work is done. Note that in today's supply issues due to COVID, many people are finding projects that would have taken a few weeks to schedule are taking months while waiting for one or more items. If you wait until the project is started or done, the big balance on your credit card bill makes getting approved more difficult.

  4. You local financial institution may have loan programs for second mortgages, and home equity lines of credit that can be better than the 7% interest on the signature loan. Those take longer to approve, some have closing costs. In some cases the interest could be deductible, though the tax laws have changed in the last few years.

  5. How long will the project take? Will it be days, weeks, months between when you pay the initial deposit and the final step in the project. Would you have to make some credit card payments during the length of the project.

  6. How many people will you have to pay? Sometimes plumbers don't do drywall/ And drywall people don't do paint. And none of them do carpet or flooring. Unless you have general contractor you will be paying multiple companies. How does this complicate your plan?

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Some minor downsides to using the CC:

  1. Adding $12K to your credit card will increase your credit utilization percentage, and subsequently lower your credit score for one billing cycle (in most scoring models). The amount it increases obviously depends on the denominator represented by the sum total of your credit lines, but it's likely to have some effect on your score. It will shoot right back up the following month, but if you were about to apply for a loan during that time I might avoid it.
  2. The difference between what the contractor pays in CC fees and your 2% gain in cash back, is profit going to the bank. Since home repairs are almost always customized, the price would be negotiable. That extra bank profit could easily be split by you and the contractor instead. For example, you might both come out ahead if you agree to a 2.5% discount if you paid via check instead of via credit card.

One additional upside to using the CC:

  1. If the contractor doesn't live up to their end of the deal, you can dispute credit card transactions. Note, in my experience CC disputes tend to be all or nothing though, and it may be difficult to successfully dispute an entire transaction when work was definitely done, even if it wasn't to your complete satisfaction. (Partial chargebacks are possible, but they seem to be rarer and more complicated.) To take full advantage of this sort of protection, it may be better to structure payment into 50% down and 50% after completion, so that in the unlikely event that it comes to this, you'd have a better chance of a successful chargeback for, say, half of the cost on an unsatisfactory renovation.

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