Should I use a HELOC to pay off credit card debt?
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If you have a lot of credit card debt, you probably wish there was an easy way to pay it off all at once. For some people, a home equity line of credit (HELOC) provides the solution. Taking out a line of credit against your home’s equity can help you consolidate and pay off old debt, and HELOCs generally offer significantly lower interest rates than credit cards.
That said, taking out a HELOC comes with its own risks—including the risk of losing your home. Here’s what you need to know about using a HELOC to pay off credit card debt.
What is a HELOC?
A home equity line of credit, or HELOC, allows you to take out credit against the available equity in your home. Your home does not need to be paid off in order to be eligible for a HELOC.
With a HELOC, you receive a line of credit based on a percentage of your home’s value minus the amount of money you still owe on your home. If your home is worth $800,000 and you still owe $100,000, for example, requesting a HELOC at 50 percent of the value of your home and subtracting the $100,000 owed would give you $300,000 in credit.
A HELOC offers a revolving line of credit similar to a credit card, which means you can borrow money, pay it back, and borrow again. This is what differentiates a HELOC from a home equity loan, which offers a single lump sum that must be paid back within a designated time period.
A typical HELOC lasts for about 25 years and includes both a draw period and a repayment period. During the draw period, which might last for up to 10 years, you are allowed to draw money from your line of credit. During the repayment period, which lasts for the remainder of the HELOC term, you will no longer be able to draw from your line of credit and will need to pay back any money owed. You’ll be paying interest on your HELOC during both the draw and repayment periods, so do some comparison-shopping beforehand to secure the best HELOC interest rates.
How can you use a HELOC to consolidate credit card debt?
If you want to consolidate credit card debt and pay it off quickly, a HELOC is one way to get the job done. Simply apply for a HELOC and use the line of credit to pay off your credit card debt. You’ll still have to pay off the money you borrowed from your HELOC, but you’ll generally have a longer period of time in which to make the payments and your HELOC will likely have a much lower interest rate.
Advantages of paying off credit cards with a HELOC
You can pay off all your credit cards at once
Instead of trying to pay off credit card debt bit by bit (maybe with the snowball method or the avalanche method), a HELOC lets you pay off your credit card debt all at once. If you are currently feeling overwhelmed by credit card debt, using a HELOC to pay off your debt can provide significant mental relief.
Your interest rate will be lower
The average credit card interest rate is almost 17 percent. The average HELOC interest rate is 4.27 percent as of December 15, 2021. Keep in mind that these are variable interest rates, which means they can go up or down depending on the prime rate—but even if your HELOC interest rate goes up, it’s still likely to be much lower than your credit card interest rate.
Disadvantages of paying off credit cards with a HELOC
You might end up in even more debt
Nobody pays off their credit cards with the intention of going right back into credit card debt again—but if you don’t practice healthy financial habits, you could find yourself right back where you started. If you use a HELOC to pay off your credit cards and then build up a bunch of new credit card debt, you’ll have both the credit card debt and the HELOC debt to pay back. That might be more than your finances can handle.
You might lose your home
HELOC debt is secured debt, which means that if you don’t pay it off in full, the lender has the right to claim whatever you put down as collateral. With a HELOC, that’s your home. When you take out a HELOC, you run the risk of foreclosure if you miss payments or can’t pay back the principal within the designated time period.
The bottom line
There are other tools to help you consolidate and pay down your debt quickly. A balance transfer credit card or a zero interest credit card, for example, can help you pay off existing credit card debt during an intro APR period. You can also work with a reputable debt counseling service to manage your finances and pay off your debt over time. When it comes to repaying debt, you have a lot of options—and taking out a HELOC to pay off your credit cards is just one of them.