How Does Using a HELOC to Pay Off Credit Card Debt Work?

A home equity line of credit (HELOC) allows you to access your home equity for various purposes.

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.
• It's best to pay off your HELOC before the draw period concludes.

A home equity line of credit lets you tap into your home equity. You can use the capital for any purpose. While it doesn’t make sense to use a HELOC in all cases, it’s often a good idea to use it to pay off your credit card debt. This guide will explore the pros and cons of using a HELOC to wipe away your credit card debt and how the process works.

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How You Can Use a HELOC to Pay Off Credit Card Debt 

A HELOC allows you to access some of your home equity. Property owners build equity through appreciation and monthly payments. You can use the funds for any purpose, but you can borrow money against your HELOC credit limit, equal to the remaining balance on your credit card. You will have a clean slate with your credit card, and you can pay off the HELOC before the draw period concludes.

Pros and Cons of Using a HELOC to Eliminate Credit Card Debt

These are some of the advantages and disadvantages of using a HELOC to eliminate credit card debt.

Pros

• Improve your credit score: Wiping out your credit card debt can improve your credit score and help you stay on top of payments. You will then have to make a monthly payment equal to 1% of your HELOC’s unpaid balance.
• 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.
• Increase your credit limit: A HELOC increases how much capital you can borrow, which strengthens your credit utilization ratio. You can end up with a higher credit score, and you can tap into more funds if necessary.
• 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.

Cons

• 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. This event will temporarily reduce your credit score. Make sure you aren’t applying for an important loan for 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 the 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 for your property.

What to Consider Before Using a HELOC for Credit Card Debt

HELOCs are significant financial products. They can get you out of credit card debt, but you should consider the following before you get started.

Develop a Repayment Strategy

It’s easier to pay off a HELOC than a credit card. You have to contend with a lower interest rate and only pay 1% of the HELOC’s unpaid balance. However, you still need a repayment strategy. If you had to use a HELOC to get out of credit card debt, you should make some modifications to your budget and financial planning so you stay on top of your HELOC payments.

Examine Financial Stability

Some individuals may not require a HELOC to pay off their credit card debt. Avoiding a HELOC may save you hundreds of dollars, as you won't incur closing costs. It’s important to assess how you got into credit card debt and if you are changing any of your financial habits to avoid repeating the cycle. 

Research Loan Fees and Terms

Loan fees can add up in a hurry, and not all HELOCs have unfavorable terms. You may prefer a 10-year draw period, whereas your current lender may offer only a 5-year draw period. Comparing choices and doing your research can help you find the right HELOC for your financial needs.

How to Apply for a HELOC to Pay Off Credit Card Debt:

You can follow these steps to apply for a HELOC and wipe out your credit card debt.

• Shop around: Compare lenders, rates, and terms to determine the most suitable offer for you.
• Get prequalified: Some lenders offer prequalification, which you can complete online. Having prequalification will give you a better understanding of what type of financing you can get.
• Apply for HELOCs: You can apply for some HELOCs and see what offers you receive. Lenders will want you to get an appraiser to assess the property’s value. Then, you will have to wait for approval.
• Choose a loan offer: If you receive multiple loan offers, you have to decide which one is right for you. Comparing rates and terms can help you save money with your HELOC.
• Use the HELOC to pay off your card: You will then receive access to the HELOC’s credit line. You can withdraw cash from the credit line and use it to pay off your credit card debt.

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Other Options 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 12-18 months. The downside with this approach is that you may incur balance transfer fees from your old card and your new one. However, you have several months when interest will not accumulate on your card, giving you time to pay off your balance.

Personal Loans

Personal loans are unsecured financial products that give you the capital that you need. You’ll have to make fixed monthly payments over several years. The downside with personal loans is that they usually have higher interest rates than HELOCs and home equity loans. However, they are much easier to get 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.

Get Rid of Credit Card Debt

A HELOC is a useful financial product that can wipe out credit card debt and help with other expenses. Consumers can also consider several alternatives to chip away at their debt. Credit card debt often carries some of the highest interest rates in the industry, so using another loan to eliminate your card's balance can help you save money.

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