Credit card debt gets tiresome quickly. You pay your monthly minimums, maybe a little more when you can afford it, but the balances on your cards never seem to go down. If you’re sick of juggling multiple high-interest payments, consolidating your debt can help.
And if you’re a homeowner, you have a powerful tool that can help with debt consolidation: your home’s equity. A home equity line of credit uses your home’s equity to offer you a built-in line of credit you can draw on for various purposes, debt consolidation included.
How to use a HELOC to Consolidate Credit Card Debt
A home equity line of credit, which the bank may call a HELOC (pronounced HEE-lock), is similar to credit cards in that you can draw on your credit line as often as you need to up to a certain limit. The difference is that you’re using your house as collateral, so you need a good credit score to qualify.
That means the interest rate is lower than your credit card interest rate, making it an ideal way to get out of credit card debt faster — if you qualify and have enough equity. For more information on that, read our article on how HELOCs work.
As a brief overview, HELOCs have both a draw period and a repayment period. You can draw from the credit line for typically up to 10 years, and your repayment period can be up to 20 years
Once you get your HELOC, you can pay off your credit card debt in one lump sum (or several if you have more than one card). Then, you just pay off your HELOC according to the terms of your agreement. You can save money and pay down debt faster because you’re paying less interest. But if more time was what you needed, you have that too.
Once you pay off your debt, you can either keep borrowing against the HELOC for other purchases, such as home improvements, or close the account. Just don’t open any more credit card accounts while you’re paying it off, or you could compound the problem.
What Happens to Your Home if You Don’t Pay It Back
One important thing to note with HELOCS: Your home acts as collateral. If you can’t pay your credit line down, the bank can seize your home and use it to pay back your debt.
That said, HELOCS are a valuable tool. If you’re 100% sure you can pay it back, consolidating credit card debt with a HELOC can save you a lot of money in the long run because HELOCs tend to have much lower interest rates than credit cards.
Pros & Cons of Using a HELOC for Credit Card Debt Consolidation
HELOCs are convenient products for homeowners who’ve paid off a good portion of their mortgage. They provide an easy way to consolidate debt, but that doesn’t mean they don’t have some risks associated with them too.
- Lower interest rates
- One lower monthly payment
- Longer repayment terms
- Potential increase in credit score
- Potential tax deductions
- Risky loan type
- Potentially variable interest rates
- Not free
- Drop in home equity
- Potentially more interest over time
While HELOCs are only available to one specific audience (homeowners with equity in their homes), their benefits make them a worthwhile product.
- Lower interest rates. For those with good credit, HELOCs offer lower interest rates than credit cards, which often have rates in the 20% range.
- One lower monthly payment. If you have five credit cards, all with their own monthly payment date, consolidating these payments into a single monthly payment with a single due date can help you budget a lot easier.
- Longer repayment terms. Since the loan can span up to 30 years, depending on the draw and repayment periods, a HELOC can give you the time you need to finally pay off your debt.
- Potential increase in your credit score. Having multiple credit cards maxed out does a number on your credit utilization. If you free up those credit lines and opt for a single loan, you may see an increase in your credit score as your credit utilization drops.
- Potential tax deductions. The interest you pay on credit cards isn’t tax deductible, but the interest you pay on your HELOC might be if you use the funds to improve your home. If you want to use your HELOC for home improvement projects after you’ve paid off your credit card consolidation, you can qualify for a deduction.
HELOCs come with some serious risks and aren’t always the right choice when consolidating debt. So there’s a lot you need to understand first.
- Risky loan type. You’re using your actual home as collateral, and that’s part of the reason HELOCs offer better interest rates. That results in less risk for the lender because if you don’t pay it back, the bank can just take it.
- Potentially variable interest rates. Some HELOCs have variable rather than fixed interest rates. That means your interest rate can fluctuate, leaving you paying more and more as time goes on.
- Not free. When you take out a HELOC, you’re essentially taking out another home loan. As such, you have to pay many of the same fees you did when you originally bought your house. That includes closing costs and appraisal fees.
- Drop in home equity. If you take out a HELOC, you no longer have that big chunk of equity you worked so hard to build. While consolidating your debt is a worthwhile endeavor, ensure that’s how you want to use your home’s equity.
- Potentially more interest over time. Since you’re extending the life of the loan, if you’re not careful, you could pay more in interest than you bargained for.
Factors to Consider Before Using a HELOC for Credit Card Debt Consolidation
Getting a HELOC isn’t an easy process. It takes time and a lot of paperwork, so before you jump in, prepare for the process. Various factors can help you understand whether a HELOC is the right financial product for you.
Financial Situation & Goals
When you take out any loan or credit line, you need to look at your financial picture as a whole — the lender will.
When considering whether a HELOC is right for your current financial situation, consider your:
- Income. While a HELOC should theoretically make your debt payments easier to manage, there’s a lot more on the line if your income suddenly drops or you lose your job down the line. Consider your current and future income potential, as HELOCs are long-term loans.
- Employment stability. You must consider more than the dollar amount of your income. Is your job stable? You may be in a high-paying position now, but will you always be? If you’re in a stable or growing profession that doesn’t have a history of layoffs, making payments 20 years down the line may not be an issue.
- Ability to repay the loan. Do you have too many other debts and bills you’re balancing? If so, is a HELOC worth the risk you could lose your home in addition to the same consequences you’d pay for not paying off your credit cards?
- Future financial goals. Using your home’s equity now means it won’t be there in the near future should an emergency or other financing need arise, such as a bad foundation or flood damage.
Interest Rates & Loan Terms
Interest rates tend to be much higher for credit cards than HELOCs. While credit cards hover around the 20% mark, HELOCs average much lower rates in the single digits.
Of course, interest rates aren’t the only thing that adds to your monthly payment. You’ll need to consider all features of the HELOC, including:
- Appraisal costs. You need your home appraised to assess its value. Typically, you’ll pay a few hundred dollars to get an appraisal.
- Closing costs. Closing costs run anywhere between 2% and 5% of the total HELOC amount.
- Length of the loan. The interest rate you get varies by the length of your loan. A 10-year HELOC has slightly lower interest rates than 20-year HELOCs since the length of time the bank is taking a risk is lower. But you have to pay interest over the life of the loan, which is a long time on longer-term loans, so factor that into the final loan amount.
Risk Tolerance & Homeownership
If the idea of putting your home up as collateral makes you nervous at all, a HELOC might give you more sleepless nights than it’s worth. You never truly know what your financial future holds, so putting your house on the line isn’t always the best move.
So look at the reasons you got into credit card debt in the first place and address them. If you need to reign in your spending and can’t get a handle on managing your money, taking on additional debt — especially debt attached to your home — isn’t the right option.
Defaulting on a HELOC isn’t like defaulting on other types of loans. Lenders simply send those to collections. With a HELOC, you could be at risk of losing your home.
Should You Use a HELOC to Consolidate Credit Card Debt?
If you meet every single one of the following requirements, a HELOC just might be the right choice for you:
- You’re a homeowner with a substantial amount of home equity.
- You have a good credit score and can qualify for low rates.
- You have a stable income high enough to support long-term credit payments.
- You’re comfortable with the idea of your house being used as collateral.
If you fall outside these parameters, it’s highly unlikely a HELOC is a good fit. You stand to lose too much. Homeowners who have just started paying down their debt simply won’t meet equity requirements. Same for those with poor credit scores.
Additionally, anyone who doesn’t have a consistent income should opt out of HELOCs since keeping up with payments may be difficult. And if you’re not willing to pay the penalty (your house) for continued missed payments, think about other debt-consolidation options.
Alternatives to HELOC for Credit Card Debt Consolidation
HELOCs don’t offer the right features to be a viable option for most people with credit card debt. Most borrowers with a mountain of debt just shouldn’t take the risk. Fortunately, many alternatives are less risky and tend to be more flexible.
Balance-Transfer Credit Cards
While it might seem counterintuitive to put all your credit card debt on another credit card, balance-transfer credit cards can help responsible users pay off their debt. The biggest perk balance-transfer credit cards have over HELOCs and many other debt-consolidation options is the ability to pay off your debt interest-free.
Most balance-transfer credit cards come with a 0% introductory offer for a year or more, giving you ample time to pay down your high-interest debt from other credit cards. If you can manage this repayment time frame and have at least fair or good credit, a balance-transfer card is a strong first choice.
Personal loans can help you consolidate your debt into one easy payment, just like a HELOC does, but they don’t use your home as collateral. While personal loans tend to have higher interest rates than HELOCs, with good credit, you can likely still qualify for a loan that has a lower interest rate than your credit cards.
You get your money in a lump sum, which you can then use to pay off your credit card balances. In their place, you’re left with one monthly payment to the personal loan lender. Personal loans typically have terms of one to five years.
There are debt-consolidation companies specially set up to help you pay off your debt. These companies accept a range of credit profiles, offer various term lengths, and offer lower interest rates for those with the credit to qualify.
The loan operates much like a balance-transfer credit card but is often a fixed-interest loan you have set monthly payments for. You take out a loan for the total cost of your debt, which you then use to pay off multiple debt payments.
Generally, a HELOC is helpful when you’re consolidating debt since they come with low interest rates. But there are also closing and appraisal fees as well as the requirement of a high credit score for approval. You also need to be fully comfortable with your house being the collateral that guarantees your loan.
But if you decide it’s the right option for you, watch out for scams. Be wary of companies that seek your business and require you to pay upfront or who make the process complicated.
Reputable lenders offer options you can verify and have good reputations with companies like the Better Business Bureau.
Never give your personal information without verifying who you’re speaking with and the company they represent.