Should I Use a HELOC To Pay Off Credit Card Debt? (2024 Guide) (2024)

A home equity line of credit (HELOC) is a type of secured debt that uses the equity you’ve built up in your home as collateral. Equity is the value of your home minus any remaining mortgage balance. So if your home is worth $400,000 and you owe $200,000 on your mortgage, your equity is $200,000.

With a HELOC, you’re essentially borrowing money against this equity. It’s like having a credit card that’s backed by the value of your home.

Here’s how it works: Once you’re approved for a HELOC, you’re given a maximum amount of money you can borrow. You can then borrow from this line of credit as needed, similar to how you use a credit card. You’re only required to pay back the amount you borrow plus any interest that accrues.

One unique feature of a HELOC is that it usually has two phases: a draw period and a repayment period.

• The draw period is when you can borrow money from your HELOC for debt consolidation, home improvement projects or just about anything else. This period could last several years, during which you’re often solely required to make interest-only payments.
• After the draw period ends, you enter the repayment period. This is when you can’t borrow any more money from your HELOC, and you must start repaying the principal along with accrued interest. Repayment periods typically last 10 to 15 years.

Because HELOCs use your home as collateral, they often have lower interest rates than credit cards. But be cautious: If you can’t make the monthly payments, you could risk losing your home to foreclosure.

>> Related: What is a HELOC?

If you have equity built up in your home, you can consider using a HELOC to pay off credit card debt. When you have multiple credit card debts with different due dates and payment amounts, it can get confusing and difficult to keep track of them all.

By consolidating these debts into a single HELOC, you simplify things. You make one monthly payment to the HELOC, which covers all your credit card debts. This streamlines your payments and makes budgeting easier.

Using a HELOC can also help you lower interest costs. Credit cards often come with high interest rates, making it tough to make real progress on paying down your debt. But with a HELOC, the interest rates are usually lower. This means more of your payment can go toward reducing the actual debt rather than just covering interest.

HELOCs aren’t a guaranteed solution for fixing your financial situation. Consider these pros and cons before you use a HELOC to pay off your credit card debt.

Pros of Using a HELOC for Credit Card Debt

• Lower interest rates: HELOC interest rates are generally lower than credit card interest rates. HELOC rates currently range between 7% and 9%, according to Experian, while the most recent average rate on credit cards stood at 21.2%, according to the Federal Reserve.
• One simplified payment: Consolidating your credit cards into a single HELOC payment can take away the headache of having to juggle multiple credit card payments every month.
• Flexible repayment terms: You can typically choose to make principal and interest payments or interest-only payments during the draw period. This flexibility can give you more control over how quickly you pay off your debt depending on your unique situation.

Cons of Using a HELOC for Credit Card Debt

• Puts your home at risk: You use your home as collateral for a HELOC. If you can’t make the payments, you could potentially face foreclosure and lose your home.
• HELOCs usually have variable interest rates: While HELOCs typically have lower interest rates than credit cards, the interest rate is still usually variable and can change over time. Your lender will reset the rate periodically based on market conditions. This can make it difficult to budget for the monthly payments.
• Lender fees may apply: Some lenders charge fees for opening a HELOC, such as application fees, appraisal fees and closing costs. These fees can add up and make the cost of using a HELOC more questionable.
• Watch out for balloon payments: If you don’t manage your HELOC monthly payments properly, you could be hit with a large “balloon payment” at the end of your repayment period. This large payment can trap you in a cycle of debt if you can’t pay it off or, worse, could result in losing your home.

>> Related: Learn more about the pros and cons of a HELOC.

Using home equity to manage debt can be a strategic move. But it’s also risky, so careful planning is key. Consider following these steps if you’re thinking about using a HELOC for debt consolidation.

1. Assess Your Financial Situation

The first question to ask yourself is this: Do I have enough equity in my home to qualify for a HELOC? If the answer is no, look for an alternative. If the answer is yes, it’s time to assess your credit score.

Your credit score plays a significant role in getting approved for the lowest HELOC rates. You’ll also want to make sure you have a stable income and a debt-to-income ratio signaling you can afford to make the monthly payments on your HELOC.

A debt-to-income ratio is a financial metric that compares your monthly debt payments to your monthly income. For example, if your monthly debt payments are $2,000 and your monthly income is $6,000, your debt-to-income ratio is 33% ($2,000 divided by $6,000 multiplied by 100).

If you’re not sure if a HELOC is right for you, consider meeting with a credit counselor. A credit counselor can help you evaluate your options, create a budget and even develop a debt repayment plan.

2. Research Lenders

Different types of financial institutions, such as banks and credit unions, offer HELOCs. Research various lenders to find the right HELOC for your needs. Before applying, gather necessary documentation such as proof of income, property value estimates and credit history. This documentation helps lenders assess your eligibility and determine the amount you can borrow.

3. Get Prequalified

To get an idea of what options are available to you, you can get prequalified for a HELOC. This involves providing basic information about your income, credit score and property value to the lender. In exchange, you get an estimate of how much you could borrow and at what interest rate.

Getting prequalified with different lenders can help you compare terms, HELOC interest rates and lender fees. This information will help you determine which HELOC best aligns with your debt repayment goals.

4. Apply for a HELOC

Once you’ve found a lender that you’re interested in working with, you’ll need to apply for a HELOC. This involves submitting an application and providing documentation to the lender. They will then evaluate your application and determine whether you qualify for the loan.

If you’re approved, the lender will provide you with details about the credit limit, interest rate, draw period and repayment terms for which you qualify. You can then use the line of credit to pay off your credit cards.

Getting prequalified for a HELOC doesn’t automatically mean your official application will get approved. It can help to have a backup plan in case your application is declined. Depending on your situation, this backup plan could include getting a balance transfer card or personal loan to pay off credit card debt.

>> Related: Learn more about how to get the best HELOC rate.

If you don’t want to use a HELOC to pay off credit card debt, consider the following alternatives.

Debt Snowball or Avalanche Method

Your first option is to keep your credit card debt as-is and use a debt repayment strategy to pay it off. There are two popular strategies you could use to pay off debt: the debt snowball method and debt avalanche method.

With the debt snowball method, you start by paying off your smallest credit card debt first while making minimum payments on the others. As you pay off each debt, you move on to the next smallest. This approach can build momentum as you wipe out smaller debts early on.

The debt avalanche method is slightly different because you start by paying off the debt with the highest interest rate first. You put any extra money toward the highest-interest credit card while making minimum payments on the rest. This method may save you more money on interest because you’re tackling the most expensive debts first.

These methods might be better than using a HELOC if you’re determined to pay off your credit card debt without risking your home. Neither involves taking on new debt, and both can help you build financial discipline. The biggest downside is that you miss out on the opportunity to potentially lower your interest rates.

Balance Transfer Credit Cards

A balance transfer card is a credit card that lets you move your existing credit card balances onto it. It often has a promotional 0% APR period where your balance doesn’t accrue any interest. This can give you a little bit of breathing room, so you can focus on paying down what you owe.

But these cards often have balance transfer fees, and the low interest rate doesn’t last forever — it can generally last anywhere from six to 21 months, according to our research. If you don’t pay off the balance within the promotional period, the interest rate can jump significantly.

Additionally, most balance transfer cards require a good credit score to qualify. So, while they can be a useful way to save money on interest and pay down your debt faster, lower credit scores could be a limiting factor.

If you have equity built up in your home, you might be considering using a HELOC to pay off credit card debt. Using a HELOC for debt consolidation can open up the doors to lower interest rates and streamlined payments. But it also carries risks. With a HELOC, your home is used as collateral, and you could lose it to foreclosure if you fail to make your payments. HELOCs also typically have variable interest rates that can cause your monthly payments to change over time.

If you’re on the fence, alternative methods such as balance transfer credit cards and debt repayment strategies can help you become debt-free without leveraging your home. Every individual’s financial situation is unique, so consider your overall financial health, credit score and property value to determine if using a HELOC to pay off credit card debt is right for you.

>> Related: Learn more about debt consolidation.