Should I Use a HELOC to Pay Off Credit Card Debt?
A HELOC can be a smart way to pay off credit debt for some homeowners, but it also comes with risks to consider. It may not be right if you worry about making your payments on time or you may be tempted to rack up debt again.
When you own a home, you build equity as your property gains value and you pay down your mortgage. If you build enough equity, you can borrow from it using various financial tools, like a home equity line of credit (HELOC).
HELOCs can be used to pay for just about anything, but for some homeowners, they may be a good option for paying off credit card debt. There are risks and drawbacks to consider, though, and the move isn’t right for everyone.
Can You Use a HELOC to Pay Off Credit Card Debt?
You can use a HELOC to pay off credit card debt—or any type of debt—if you’d like to.
This might be a good idea if you can get a lower interest rate than what you’re currently paying on your credit card debts or if you want to simplify your finances, as it can roll all your debts into one easy-to-manage monthly payment.
However, because you are using your home as collateral on the HELOC and you risk losing your home if you don’t make your payments, it may not be the best option for credit card debt repayment. Additionally, because your HELOC is limited by the amount of equity you have in your home, you may not be able to borrow enough to cover your debts.
Pros and Cons of Using a HELOC to Pay Off Credit Card Debt
Using a HELOC to pay off credit card debt can be smart in some situations, but it also has some notable drawbacks to consider.
Pros
- Lower interest rates: HELOCs usually have lower interest rates than other forms of credit, particularly credit cards and other unsecured types of debt. This can reduce your monthly debt payments and long-term interest costs.
- Flexible borrowing: You can often borrow large amounts with HELOCs, and they allow you to withdraw money as needed over an extended period of time—usually 10 years—called the draw period. You can also repay part or all of your balance and re-borrow the funds as long as you’re in the HELOC’s draw period.
- Potentially faster payoff timeline: If a HELOC allows you to reduce your interest rate and you continue putting the same amount of money toward your HELOC payment each month as before, you could pay off your debt faster than you otherwise would have.
- Simplified repayment: When you use a HELOC to pay off multiple credit card balances, it consolidates them all into your HELOC balance. You’ll then only make one monthly payment, rather than several, until your HELOC debt is paid off.
Cons
- Risk of foreclosure: A HELOC uses your home as collateral. This means if you fail to make payments, the lender could foreclose on your house.
- Variable interest rates: HELOCs usually have variable interest rates, which can fluctuate. This means your payments can change, too, potentially straining your budget.
- Potential for more debt: When you use a HELOC to pay off your credit cards, you will gain access to a new credit line and zero out your card balances. Both of these could tempt you to spend more and get further into debt.
- Reduces your equity: Borrowing from your home equity means you have a smaller stake in your house. This could be a danger if your home loses value or you need to sell the property.
- Comes with fees: HELOCs come with closing costs, much like traditional mortgages. You’ll usually pay 2% to 5% of the credit line amount to take out a HELOC.
Should You Use a HELOC to Pay Off Credit Card Debt?
HELOCs can be a good way to pay off credit card debt, but they’re not the right strategy for everyone. For example, a HELOC might be a good option if you have a good credit score (you typically need a score of 620 or higher), you have your spending under control and you can handle the fees and fluctuating payments that come with a HELOC.
On the other hand, you might want to avoid using a HELOC to pay off credit cards if you can use other payoff methods that don’t require taking on additional debt (more on this below), you have poor credit, you think you may be tempted to overspend with the credit line or rack up credit card debt again, or you worry you might not be able to make payments, thus risking foreclosure.
How to Pay Off Credit Card Debt With a HELOC
To use a HELOC to pay off credit card debt, you will apply for the line of credit, get approved and then withdraw money from your credit line to pay off your credit card balances.
This doesn’t remove the debts entirely but instead rolls those balances into your HELOC, allowing you to pay them off with one single monthly payment—often at a lower interest rate.
To ensure you can pay off your HELOC on time and to minimize the interest you pay for borrowing the money, you should:
- Create a clear repayment plan. Put together a monthly budget, and have a plan for how you will afford your HELOC payments. You may need to analyze your expenses and cut costs in some areas to do so.
- Make principal and interest payments if possible. While some HELOCs let you make interest-only payments during the draw period, it’s best to pay more than that if possible. Paying only interest could lead to unmanageable payments during the HELOC’s repayment period.
- Avoid racking up more credit card debt. Once you’ve used a HELOC to pay off credit card debts, it’s critical you don’t rack up balances on your cards again—or withdraw unnecessarily from your credit line.
Alternatives to Using a HELOC to Pay Off Credit Card Debt
HELOCs aren’t your only options for paying off credit card debts. You can also use these tools and methods to consolidate your credit card balances:
- Debt avalanche or snowball method: These payoff methods help you delete your credit card balances without taking on more debt. With the debt avalanche method, you’ll focus on paying extra on cards with the highest interest rates, while the debt snowball method has you knock out your smallest balances first to help you maintain momentum.
- Balance transfer credit card: Balance transfer cards are credit cards you can use to pay off other card balances. They have introductory 0% interest rates for a limited period of time, often 12 to 21 months, after which interest will accrue at the card’s normal rate.
- Home equity loan: These are similar to HELOCs, letting you borrow from your home equity, only they come with a single, lump-sum payment. They also have fixed interest rates and payments.
- Cash-out refinance: This replaces your current mortgage loan with a new, larger one. You get the difference as a lump sum payment and then can use the money to pay off your credit cards.
- Debt consolidation loan: A debt consolidation loan is a type of personal loan that you can use to pay off debts—credit card balances, medical bills or other types of debts you might have outstanding. These usually have fixed interest rates and have repayment terms of one to seven years.
The Bottom Line
Whether or not you should use a HELOC to pay off credit card debt depends on your needs, financial circumstances and spending habits. It can be a smart option for some homeowners, but for others, it can be a risk that may not be worth it.
If you do opt to use a HELOC to pay off debts, remember that your credit score and credit history will impact whether or not you qualify for a HELOC, and at what interest rate. You can check your credit report and FICO ® Score Θ for free from Experian before deciding whether a HELOC is right for you.
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About the author
Aly J. Yale is a writer and editor based in Houston. Over the past 15 years, she has covered personal finance, mortgages, real estate, investing, insurance, credit cards and lending, among other financial topics.
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