A home equity line of credit (HELOC) allows you to access your home equity for various purposes, including credit card debt.
Americans have more than $1 trillion in credit card debt, and if you’re in that category, you probably want to find a quick way to pay it off. For some homeowners, a home equity line of credit, or HELOC, could help them eliminate that debt.
Using a HELOC to pay off credit card debt comes with several advantages, including lower interest rates and an opportunity to improve your FICO score.
“The key is having a solid repayment plan and treating the HELOC as a debt management tool, not a way to free up credit cards for more spending,” says Reed Letson, owner of Elevation Mortgage.
Here, we’ll explore the pros and cons of using a HELOC to wipe away your credit card debt and how the process works.
A home equity line of credit (HELOC) allows you to access your home equity for various purposes, including credit card debt.
How to Use a HELOC to Pay off Credit Card Debt
Paying off credit card debt with a HELOC is similar to using another credit card to pay off the original debt. You’ll apply for, and hopefully be approved for, a credit limit based on the equity built into your home and borrow against it to settle your debts.
The main benefit of this strategy is that you’ll pay less in interest.
“HELOCs typically offer significantly lower interest rates than credit cards, often 6-8% compared to credit card rates of 20% or higher,” Letson says. “This interest rate difference alone can save thousands in interest payments.”
One difference, however, is that a HELOC is secured by your home, meaning it can be foreclosed on if you miss your monthly payments. On that note, Letson recommends people examine their credit usage before taking out the loan.
“You need to address the spending habits that led to the credit card debt in the first place, or you might end up with both HELOC and new credit card debt,” he says.
Who Should Consider Using a HELOC to Pay off Credit Card Debt
Here are a few people who should consider using HELOC funds to pay off their credit card debt:
- People with sufficient home equity to cover their credit card debt: HELOCs grant you up to 80% of your home’s equity (the property’s value minus the remaining mortgage balance). If this amount is equal to or greater than your credit card debt, using a HELOC may be a good strategy.
- Those committed to not running up new credit card balances: We’re not saying you should never use your credit card, but you should develop new habits that prevent you from getting back into this situation.
- People with a stable income to cover the HELOC payments: As long as you’re able to cover the monthly payments on your HELOC, using it to eliminate credit card debt may be a good idea.
- Anyone with high-interest credit cards: Using a HELOC in this situation can help you avoid thousands in interest payments.
Pros of Using a HELOC to Pay Off Credit Card Debt
- Improve your credit score: Wiping out your credit card debt can improve your credit score and help you stay on top of payments.
- Avoid high interest rates: Mortgage rates are at levels we haven’t seen in more than 20 years. However, these rates are still much lower than what you’ll get with a credit card. Your HELOC interest accumulates at a much slower pace than your credit card’s interest.
- Plenty of time to repay: It’s ideal to repay your entire HELOC balance swiftly instead of letting interest accumulate. However, most lenders offer 10-year draw periods, so you can make the minimum payment until then.
Who Should Not Use a HELOC to Pay off Credit Card Debt
Not everyone should use a HELOC to pay off credit card debt. Here are a few people who should consider alternatives.
- People with poor spending habits: Some people get into credit card debt for unavoidable reasons (such as medical expenses), but if your debt is the result of bad spending habits, then a HELOC may not be the best choice for you.
- Those who can’t afford the monthly payments: Yes, a HELOC has less interest than credit cards. That said, if you’re unable to make the payments, you could lose your house in the process.
Cons of Using a HELOC to Pay Off Credit Card Debt
- Closing costs: You will have to contend with closing costs, which can range from 2% to 6% of the HELOC’s total balance.
- Hard credit check: Requesting a home equity line of credit will trigger a hard credit inquiry, though some HELOC lenders perform a soft credit pull. A hard credit inquiry will temporarily reduce your credit score. Make sure you aren’t applying for an important loan in the next few months.
- Possibly enabling bad money habits: A HELOC can get you out of credit card debt, but it can also enable bad money habits. Some people get deeper into credit card debt after using home equity to pay off their previous balance.
- Less equity in your home: If you sell your home, you won’t make as much cash. You must repay a home equity line of credit with the proceeds of the home sale before realizing your profit. You also have to pay off the mortgage with the sale proceeds if you still have one on your property.
RELATED: How does a HELOC affect credit score?
Alternatives to Using a HELOC for Credit Card Debt Repayment
You don’t have to use a HELOC to pay off your credit card debt. Here are some other options:
Home Equity Loan
A home equity loan gives you an immediate lump sum that you can use to pay off your credit card debt. This financing option taps into your home equity and has fixed monthly payments. You won’t have to worry about staying on top of a draw period or letting interest accumulate.
Balance Transfer Credit Cards
You can transfer your credit card balance to a new card and capitalize on an introductory 0% APR rate. Credit card issuers have intro periods that range from 12 to 18 months. The downside of this approach is that you may incur balance transfer fees from both your old card and your new one. However, you’ll have several months without accumulating interest, giving you time to pay off your balance.
Personal Loans
Personal loans are unsecured financial products that give you the capital you need. You’ll have to make fixed monthly payments over several years. The downside of personal loans is that they usually have higher interest rates than HELOCs and home equity loans. However, they are much easier to obtain and do not require an appraisal.
Debt Consolidation
A debt consolidation loan is a type of personal loan that allows you to pay off your credit card debt. These loans are relatively quick to obtain and can help you secure a lower interest rate on your balance.
Cash-Out Refinance
A cash-out refinance allows you to tap into more home equity and adjust the rate and terms of your current mortgage. A refinance isn’t the best approach if you secured a lower interest rate before the pandemic. However, you can extend the duration of the loan to keep your monthly payments the same. You aren’t stuck with a second mortgage if you opt for a cash-out refinance.
Key Takeaways
- A home equity line of credit (HELOC) can be a great way to pay off credit card debt.
- HELOCs typically have lower interest rates than credit cards
- Have a plan to pay off the loan
- Practice better fiscal habits to avoid getting back into credit card debt
Why You Should Trust Us
Benzinga has offered investment and mortgage advice to more than one million people. Our experts include financial professionals and homeowners, such as Anthony O’Reilly, the writer of this piece. Anthony is a former journalist who’s won awards for his coverage of the New York City economy. He has navigated tricky real estate markets in New York, Northern Virginia and North Carolina.
For this story, we worked with Reed Letson, owner of Elevation Mortgage, a mortgage lender that operates in Colorado and Florida.
Frequently Asked Questions
Should I use a HELOC to pay off credit card debt?
A HELOC can be a good resource for paying off credit card debt. The interest rate is lower, and you can have a draw period of up to 10 years. It’s best to compare HELOCs and other financial products before using one to pay off your credit card debt.
How does using a HELOC affect your credit score?
A HELOC only affects your credit score if your lender reports the loan to credit agencies. Additionally, some HELOC lenders perform a soft credit pull that may have a minimal impact on your creditworthiness.
Can you use a HELOC to pay off other types of debt?
Yes, you can use a HELOC to pay off any type of debt. Just ensure you can repay the loan so you don’t dig yourself further into debt.
Sources:
- Reed Letson, owner of Elevation Mortgage
- Federal Reserve Bank of New York, “Household Debt and Credit Report.” https://www.newyorkfed.org/microeconomics/hhdc
About Anthony O'Reilly
Anthony O’Reilly is an updates editor for Benzinga. He’s won numerous journalism awards for his coverage of the New York City economy and Long Island school district budgets.