Key takeaways
- A HELOC (home equity line of credit) can be a useful tool for paying off credit card debt, as it often has a lower interest rate and a long repayment period.
- Using a HELOC to pay off debt comes with risks, such as the potential to accrue more debt or even lose your home if you cannot make payments.
- A HELOC isn't your only option, and you should explore other avenues like home equity loans and personal loans — and their associated interest rates — before you choose one.
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. It’s basically borrowing money from a new source to settle the amounts you owe the old source — exchanging one debt for another. But this new debt can be easier to deal with.
The basic strategy is simple: You apply for a HELOC — a line of credit based on the percentage of your home you own outright (not mortgaged) — and use these funds to pay off your credit card bills. You’ll have to repay the money you borrowed from your HELOC, of course, but you’ll generally have a long period in which to make the payments: a decade or two. And your HELOC will likely have a much lower interest rate than your credit cards, or a personal loan.
Using a HELOC to settle credit card balances can make good fiscal sense if you own a substantial stake in your home outright. That said, this strategy comes with its risks, including the risk of losing your home.
Here’s what you need to know about using a HELOC for paying credit card debt.
A HELOC allows you to take out a revolving line of credit against the available equity in your home. Your home’s mortgage doesn’t need to be paid off to be eligible for this line of credit. But the smaller the balance, the more funds will be available for the HELOC.
A typical HELOC has a term, or lifespan, of 25 years and includes both a draw period and a repayment period. During the draw period, which might last for up to 10 years, you are allowed to draw money from your line of credit up to your credit limit. During the repayment period, which lasts for the remainder of the HELOC term, you will no longer be able to draw from your line of credit and will need to pay back any money owed. You’ll be paying interest on your HELOC during both the draw and repayment periods, so do some comparison shopping beforehand to secure the best HELOC interest rates.
How a HELOC can be a useful tool in eliminating credit card debt
There are several benefits to using a home equity line of credit to pay off credit cards.
You can pay off all your debt at once
Instead of paying off credit card debt bit by bit (with either the snowball method or the avalanche method, for example), a HELOC lets you eliminate it all at once (or within a few months). If you are currently feeling overwhelmed by the outstanding balances, using a HELOC can provide significant mental relief.
Your interest rate will likely be lower
The average credit card interest rate is more than 20 percent. In contrast, the average HELOC interest rate is hovering around nine percent as of March 2024. Keep in mind that these are variable interest rates, which means they can go up or down depending on the prime rate. Even if your HELOC interest rate rises, though, it’s still likely to be much lower than your credit card’s APR.
When should you not consolidate debt into a HELOC?
Using a HELOC to pay off debt isn’t without its risks. Some of the potential pitfalls of leveraging a home equity line of credit to pay off credit cards include the following:
You might end up in even more debt
Nobody pays off their credit cards with the intention of immediately building up those balances again — but if you don’t practice healthy financial habits, you could find yourself right back where you started, sooner rather than later.
If you use a HELOC to pay off your credit cards and then start using them again, you’ll have both the credit card debt and the HELOC debt to pay back. Plus, during the HELOC’s draw period, you might be tempted to use any leftover credit, accruing even more debt. That might be more than your finances can handle.
You might lose your home
HELOC debt is secured debt, which means that if you don’t pay it off in full, the lender has the right to claim whatever you put down as collateral. With a HELOC, that’s your home. When you take out a HELOC, you run the risk of foreclosure if you miss payments or can’t pay back the principal within the designated time period.
You might experience sticker shock
Many HELOCs allow you to repay just interest during their draw periods. If you surrender to that temptation, your monthly payments will abruptly zoom when you enter the repayment period, because they’ll now include both principal and interest. And if interest rates have risen as well, you might find your monthly obligation double or triple its previous amount — which can be a big blow to the budget if you didn’t prepare for the increase.
Is a HELOC or a HELoan better for paying off debt?
Both HELOCs and home equity loans (HELoans) can be effective ways to pay off debt. In the case of credit card debt, though, the HELoan may have a slight edge.
Presumably, you know (or can calculate) the exact outstanding amount on your cards, and presumably, you’d want to clear it as soon as possible because of their high APRs, multiplying those balances at a rapid clip. This situation is well-suited for a home equity loan, which disburses a single lump sum that gets repaid in fixed-rate monthly installments. In contrast, with their fluctuating interest rates and long draw periods, HELOCs work well when you’re not sure of the exact sum you’ll need, or for expenses that get incurred over a long period (like college tuition or a contractor’s bill on a long-term construction project).
Plus, home equity loans generally have lower interest rates than HELOCs. (As of this writing, they are averaging 8.8 percent.)
Here are some other comparisons.
| Expense | Preferable tool | Why it makes sense |
|---|---|---|
| Emergency | HELoan | Probably this is a fixed amount that would be better to repay ASAP |
| Business start-up | HELOC | Expenses are indefinite and will run over an extended period |
| Credit card balances | HELoan | You can add up exactly how much you’ll need to pay off all your plastic, which you’d presumably do all at once |
| College tuition | HELOC | You can withdraw funds as needed just to pay a semester, quarter or half-year |
| Months-long, multi-faceted home renovation project | HELOC | Gradual withdrawals ideal for paying contractor in installments; you have reserves if project has cost overruns |
| Medical bill | HELoan | Better to pay off this bill in total, sooner rather than later |
What are the alternatives to using home equity to paying off debt?
Many of these options mean you won’t have to put your home up as collateral.
Debt consolidation
One option is to roll all your credit bills together and pay them with a single debt consolidation loan, one with a lower interest rate. A reputable debt counseling service can help you do this, in addition to providing guidance on how to manage your finances and pay off your balances over time. Be aware that this strategy can have consequences for your credit score, though.
Personal loans
You could also explore taking out a personal loan. Personal loans can be easier and quicker to obtain, and they even have comparable interest rates to HELOCs — if you have a very strong credit score (720 or above). On the downside, their terms are usually shorter.
Balance transfer credit cards
Moving outstanding debt on one credit card onto a new credit card is called a balance transfer. This strategy can help you take advantage of lower promotional interest rates: You might even find one with 0 percent APR for a year or two. Just make sure you’ll be able to pay down the debt before that introductory rate period expires.
Cash out refinance
With a cash-out refinance, you can take advantage of the equity you’ve built in your home over time, similar to the HELOC. In exchange for taking out a larger mortgage, you’ll get a large chunk of cash (which you can use to pay off your credit card debt). Cash-out refis have lower interest rates than HELOCs, but do compare the prevailing rate to that of your current mortgage.
We have a more comprehensive guide to your choices that you can explore, too.
The bottom line on HELOCs and credit card debt
When it comes to repaying what you owe on your credit cards, you have a lot of options — and taking out a HELOC to pay off debt is just one of them. If you’ve got a good amount of home equity to tap, it could be the best choice. But be sure to compare the APRs and understand the repayment terms. You don’t want to get blindsided — not when it’s your home on the line.
Additional reporting by Kate Peters
