Should You Use a HELOC to Pay Credit Card Debt?

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 home equity line of credit can help you consolidate and pay off old debt, and HELOCs typically 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 to qualify 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, applying for a HELOC at 50% of your home’s value and subtracting the $100,000 owed would give you a credit of $300,000.

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 one-time lump sum that must be repaid within a set time frame.

A typical HELOC lasts about 25 years and includes both a drawdown period and a repayment period. During the drawdown period, which can last up to 10 years, you are allowed to withdraw 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 on your line of credit and will be required to repay any amount owing. You’ll pay interest on your HELOC during the draw and redemption periods, so do some comparison shopping beforehand to get the best HELOC interest rates.

How can you use a HELOC to consolidate your 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 repay the money you borrowed from your HELOC, but you’ll usually have a longer time to make the payments and your HELOC will likely have a much lower interest rate.

Benefits of paying 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 (perhaps the snowball method or the avalanche method), a HELOC lets you pay off your credit card debt all at once. If you’re currently feeling overwhelmed with 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%. The average HELOC interest rate is 4.27% 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 rate. prime, 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 credit cards with a HELOC

You could find yourself even more in debt

No one pays off their credit cards with the intention of falling back into credit card debt, but if you don’t practice sound financial habits, you could find yourself back where you started. If you use a HELOC to pay off your credit cards and then accumulate a bunch of new credit card debt, you’ll have both credit card debt and HELOC debt to pay off. It may be more than your finances can handle.

You could lose your home

HELOC debt is secured debt, which means that if you don’t repay it in full, the lender has the right to reclaim everything you put up as collateral. With a HELOC, it’s your home. When you take out a HELOC, you run the risk of foreclosure if you miss payments or can’t repay the principal on time.

The bottom line

There are other tools to help you consolidate and quickly pay off your debt. A balance transfer credit card or zero rate credit card, for example, can help you pay off existing credit card debt during an introductory 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 paying off debt, you have plenty of options, and getting a HELOC to pay off your credit cards is just one of them.

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