If you’re drowning in credit card debt, did you know you can borrow against the equity in your home to repay it? A common way to do this is by taking out a home equity line of credit.
A HELOC is a line of credit secured by your home that you can use for large purchases or to consolidate debt. However, using a HELOC to pay off credit cards comes with significant risks, so you should weigh all your options first.
HELOC vs. Credit Card Debt
A HELOC and a credit card are both revolving lines of credit that allow you to borrow money up to a maximum limit. But that’s where the similarities end. Here are the three biggest differences between credit cards and HELOCs.
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Comparing Interest Rates
Credit cards are unsecured debt while a HELOC is secured by the equity in your home, so credit cards come with much higher interest rates. The average credit card APR is 20.94%.
“While the interest rates on HELOCs are lower than those on credit cards, it’s important to remember that the interest rate on a HELOC is variable, similar to credit card interest rates,” says Ohan Kayikchyan, certified financial planner and money coach. That means the interest rate on a HELOC can fluctuate over time depending on the current market conditions.
Analyzing Repayment Terms
When you charge a purchase to a credit card, you must repay the amount you borrow with interest. At the end of the month, you can either repay the full amount you borrowed or make a minimum monthly payment. As soon as you begin spending money on the card, you’ll have to begin paying something each month.
In comparison, a HELOC is divided into two phases: the draw period and the repayment period. The draw period typically lasts 10 years and is the period when you can draw money from the HELOC. You have the option to make interest-only payments during this time.
Once you enter the repayment period, you can’t borrow any more money and must begin repaying both the interest and the amount you borrowed. The repayment period usually lasts 20 years.
Assessing the Risk Factors
A credit card and a HELOC each carry different types of risk. Because credit cards come with such high interest rates, it’s easy to get trapped in a cycle of debt. If you aren’t careful, you can get into the habit of only making minimum payments each month while continuing to rack up more debt.
A HELOC comes with lower interest rates and is more difficult to qualify for than a credit card. But if you’re unable to pay off the line of credit, you could lose your home and any equity you’ve built.
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Pros and Cons of Using a HELOC to Pay Off Credit Card Debt
Kayikchyan says using a HELOC to pay off your credit cards might make sense financially. “HELOCs are secured with your property and hence have lower interest rates than unsecured credit cards.” Here are the biggest pros and cons to consider.
Pros
— Lower interest rates. Using a HELOC for credit card debt can significantly reduce the amount of interest you pay. Since a HELOC is secured by the equity in your home, your lender sees it as less risky and will give you lower rates.
— One simplified monthly payment. Taylor Kovar, a CFP and CEO of 11 Financial, says consolidating multiple credit card balances into a single HELOC can streamline your repayment efforts. This can be a huge benefit if you’ve been juggling multiple credit card payments each month.
Cons
— You’re putting your home at risk. If you’re unable to repay the line of credit, you’re at risk of losing your home and any equity you’ve built.
— Increased costs over time. Kovar says HELOCs typically feature variable interest rates, exposing borrowers to potential rate hikes and increased repayment costs over time. “Consolidating credit card debt into a HELOC may extend the repayment period, resulting in higher total interest paid over the long term,” he says.
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Alternatives to Using HELOC to Pay Off Credit Card Debt
“Utilizing a HELOC to consolidate credit card debt can be a double-edged sword and warrants careful consideration,” says Kovar. If you’re on the fence about whether a HELOC is the best choice for your situation, he recommends a few alternatives.
First, you could apply for a personal loan with a fixed interest rate from a bank or other financial institution. The interest rate won’t be as low as what you’d receive with a HELOC, but you won’t put your home at risk.
If you have a good credit history, you may be able to qualify for a credit card with a 0% introductory APR. “Transferring high-interest credit card balances to a low- or zero-interest balance transfer credit card can offer temporary relief from interest charges,” Kovar says. However, this is only a good strategy if you’re able to repay the balance before the promotional period ends.
Finally, you might consider enrolling in a debt management plan with a reputable credit counseling agency. The agency can help you negotiate lower interest rates and consolidate your debt into a single monthly payment.
Bottom Line
Using a HELOC to pay off credit card debt could be a good choice, but only if you have the discipline to stop putting purchases on your credit cards. You should also be committed to repaying the HELOC as soon as possible.
“Otherwise, using a HELOC to pay off credit card debt becomes similar to applying a Band-Aid to a wound,” Kayikchyan says. “While it may temporarily fix the issue, it doesn’t necessarily resolve the underlying problem.”
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Is a HELOC a Smart Way to Pay Off Credit Card Debt? originally appeared on usnews.com
Update 08/24/26: This story was previously published at an earlier date and has been updated with new information.
