Should you pay credit card debt with a HELOC

Should You Use a HELOC to Pay Off Credit Card Debt?

Credit card debt is expensive. As of February 2017, the Federal Reserve lists the average credit card annual percentage rate (APR) at 13.86%. And depending on your credit situation and the kind of card you choose, your APR could be much higher.

All things considered, it’s no wonder that people often treat paying off credit card debt as an emergency situation. But there are some strategies, such as using a home equity line of credit (HELOC), that can do more harm than good if you’re not careful.

What is a HELOC?

A home equity line of credit is similar to a credit card in that you have a revolving line of credit that you can use, pay off, and use again. The difference is that most credit cards don’t require collateral, while a HELOC uses your home as collateral.

If you’re interested in a new twist on home equity lines of credit, consider Figure. The latest project of SoFi founder, Mike Cagney, claims to add transparency and simplicity to the HELOC sector.

Because of this setup, HELOCs are considered secured debt and have relatively low – and usually variable – interest rates.

As you can see, HELOCs are an enticing solution to those who own a home and have high-interest credit card debt. Why not just use the HELOC to pay off the credit card debt and then focus on paying down the lower-interest line of credit?

Just because you can, it doesn’t mean you should

The obvious advantage of using a HELOC to pay off credit card debt is that you can consolidate at a lower interest rate, even if you have poor credit. Another reason why a HELOC is appealing is because, like your mortgage payments, the interest you pay is tax deductible.

But the drawbacks to using a HELOC to pay down credit card debt far outweigh the benefits.

You could lose your home

“Utilizing a HELOC to pay off credit card debt is not a wise choice for most Americans,” says Stella Adams, chief of equity and inclusion for the National Community Reinvestment Coalition. That’s because defaulting on your HELOC payments can result in the bank repossessing your home.

“Think about it,” says Adams. “What is the worst that can happen to you if you don’t pay off that card? Compare that to what can happen if you don’t pay your mortgage.”

Simply put, it’s not worth the risk of losing your home.

Fees are high

Even if you’re disciplined enough to pay off the HELOC after consolidating, the process of setting one up is expensive.

HELOC fees are similar to the closing costs you paid when you originally bought your house. You may even have to pay an annual fee and a cancellation fee if you choose to close the account.

Depending on the lender and credit line amount, the HELOC could end up costing more than the interest savings you’d get from consolidating.

It may not solve the core problem

“I know too many clients who took out the HELOC, paid off the credit card and, within a year, ran the credit cards back up to their limits, defeating the purpose of the loan,” she says.

Of course, this can be an issue regardless of your repayment strategy. But having the lower-interest HELOC as a fallback makes it possible to justify racking up credit card debt again in the future. After all, you can just transfer the debt to the HELOC again and pay it off.

Unless you’re committed to putting credit card debt in your past, Adams says, it’s not worth putting your home in jeopardy.

Choose these options instead

If you have high-interest debt, there are other consolidation options that are cheaper and less risky.

Balance transfer credit cards

If the low interest of a HELOC is appealing to you, how does no interest sound? Balance transfer credit cards offer 0% APR promotions to help you pay down your debt more quickly and with less interest.

The best balance transfer credit cards offer promotional periods from 15 to 21 months, giving you plenty of time to slash your debt load. Keep these things in mind, however:

  1. Balance transfer cards generally require good or excellent credit. If your credit is poor or fair, you may have a hard time getting approved.
  2. Many balance transfer cards charge a fee on the amount of the transfer. The fee is usually 3% but can be as high as 5%. Be sure to note cards that don’t charge a balance transfer fee.

Personal loan

If your credit isn’t where it needs to be to get approved for a balance transfer card, consider a personal loan. You won’t get any 0% APR offers and the interest rate can be higher than that of a HELOC. But this alternative’s unsecured nature means you’re not risking any collateral.

A couple of things to keep in mind with personal loans:

  1. A lower interest rate isn’t guaranteed. Depending on your credit, you may not get approved for a loan. And if you do, the APR may even be higher than your credit card’s APR.
  2. Personal loans have a fixed repayment period and fixed monthly payments. Make sure you can afford the payments before accepting a loan.

The takeaway

Paying off credit card debt is essential to your financial health, but using a HELOC to do so can be even more hazardous. Instead of risking your house, use other methods to get rid of the debt like balance transfer credit cards and personal loans.

Also, be sure to use these tips and tricks to paying off debt along the road. With discipline and patience, you’ll be able to ditch the debt and keep it that way.

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