There are many decisions to wrestle with when you tear your house apart for remodeling. From new counter tops to the design of your new deck, you likely have a slew of questions for your contractor. Yet don’t forget the most important one: How are you going to pay for all of this?
While an increasing number of contractors are accepting credit cards, others still insist on cash or a check, which can put customers in a precarious position.
More contractors accepting plastic
Credit cards may well be the safest choice when paying for home improvements — they offer consumers protection that cash and checks don’t. Yet 80 percent of homeowners still pay for home improvement projects with checks, according to the contractor review service Angie’s List.
That’s because many contractors like it that way. Traditionally, contractors, especially smaller operations, have preferred checks and cash to the merchant fees they have to pay for processing credit card transactions.
That could be changing, though. According to a March 2012 poll of the companies graded on Angie’s List, 65 percent of respondents said they accept both debit and credit cards, up from 57 percent in 2010. More companies — 20 percent — even prefer credit cards, the survey found. That’s up from 12 percent in 2010.
“Many highly qualified and reliable companies still aren’t equipped for credit card payment, though, and unless consumers insist on credit card payments, this shouldn’t be a large factor in determining who to hire,” says Angie’s List founder Angie Hicks said.
Tips for paying your contractor
Assuming your contractor offers a variety of payment options, what’s the smartest way to pay? Here are some things to keep in mind.
Never pay it all up front: The Angie’s List survey found that 37 percent of customers were paying contractors with the most dangerous form of payment — cash. Even more troubling, 12 percent of those who paid cash paid the full cost upfront, which is one of the biggest mistakes a consumer can make, experts say. Numbers in the survey proved the danger: Of the consumers who paid the full cost up front, more than half said their contractor never finished the job.
The Contractors State License Board warns against paying more than 10 percent of the price upfront or $1,000, whichever is less. In fact, some state laws limit the amount contractors can ask for as a down payment.
Use a credit card if possible: This is the safest option for consumers. Automatic payments can be scheduled throughout the project. Each payment creates a paper trail showing transaction history. There’s also a bit of lag time with a credit card (between the time you make the charge and the time the balance is due), so if the job is botched, you have more time for recourse.
The biggest plus here are the protections.“If there’s a situation where the contractor or something you bought goes awry, you can certainly back out those charges,” says David Jones, president of the Association of Independent Consumer Credit Counseling Agencies.
If goods or services aren’t delivered as promised, you are covered under the Fair Credit Billing Act. If there’s fraud involved, federal law limits your responsibility to $50.
There are some potential drawbacks, however. If you don’t pay off your credit card balance before the due date, you’ll get hit with interest charges. For a big project that costs thousands of dollars, those interest charges could increase the cost of your home renovation significantly. Then there are merchant fees for using a credit card. Some contractors will add that to your total cost; some absorb them as the cost of doing business.
Keep in mind the limitations of debit: Paying with a debit card works like writing a check — once the payment posts, the money is gone from your account. This can help you avoid the temptation of delaying payment and racking up interest changes on a credit card — but you also lose some lag time if you discover shoddy work.Under federal law, debit card holders can’t stop payment while doing battle with a merchant as they can with a check. Moreover, some banks don’t offer the same protection for debit transactions as they would for credit purchases. So if an issue arises with a debit card, you may be forced to resolve it directly with the merchant.
“Consumers can challenge some debit card transactions, but it’s much more difficult than with a credit card,” Jones says.
Keep good records if paying by check: If you discover something is wrong with the work and have to stop payment on the check, you’ll likely have to pay a fee — typically about $30. But the ability to stop payment is a plus.If you do write a check, be sure to fill out the memo field with exactly what you’re paying for and keep a copy for your own records. Checks also help protect the contractor, providing paper records of what was paid and when.
If a contractor asks you to make the check out to a particular person (instead of a company) or to make it out to “cash,” instead of the contractor, consider that to be a flapping red flag.
If you have to pay with cash, be wary: The Federal Trade Commission warns that contractors whose only payment option is cash are often not as reputable as those who offer other payment options. If you do pay cash, get a receipt that shows exactly what the money was used for. And make smaller payments only as work is completed according to the agreed-upon schedule.“Often [contractors] will offer a discount if you pay them cash and whether they report it to the Internal Revenue Service … remains to be seen,” says Jones.
Be careful about being lured in by the discount. You maybe trading away the paper trail and legal protections and, in some cases, you may be helping the contractor cheat the government.
No matter which method of payment you prefer, be sure to get at least three detailed estimates and run your contractor’s information by the Better Business Bureau and the National Association of Home Builders, which keep logs of complaints against contractors. Jones also advises consumers to check with the consumer protection bureau or department of consumer affairs in their county or state, particularly for large projects.
Ask the contractor for references — and check them. Also ask for a copy of the contractor’s insurance certificates so you can ensure you are not liable for property damage or job-related injuries.