Can You Use A HELOC For Credit Card Debt Consolidation?

If you're among the 46% of Americans with credit card debt, you might be looking for ways to make your debt more manageable. One solution for homeowners is a home equity line of credit (HELOC). A HELOC allows you to consolidate multiple credit card balances into one payment plan with a potentially lower interest rate. Homeowners can use a HELOC to borrow against the equity in their homes, which is the difference between the home's market value and the balance owed on the mortgage.

While Rocket Mortgage^Ⓡ doesn't provide HELOCs, we can help you understand the pros and cons of getting one and compare them with other home equity options. Let's dive into the details and explore what you need to know.

Advantages Of Using A HELOC To Consolidate Credit Card Debt 

Depending on your situation, using a HELOC to consolidate your credit card debt can be a good option. A HELOC gives you the opportunity to qualify for lower interest rates and possibly better repayment terms compared to what you're currently paying on your credit cards.

Lower Interest Rates

One of the main reasons to use a HELOC to pay off credit card debt is the chance to get a lower interest rate. Credit card APRs can be much higher, sometimes reaching 25% – 30%. In contrast, HELOCs offer lower rates, typically ranging from 8% – 10%, usually because they are secured by your home. This lower rate can significantly reduce the total cost of your debt over time and free up funds to pay down your debt faster each month.

Flexible Terms For Repayment

HELOCs usually offer more flexible repayment terms compared to credit cards. During the draw period, which is typically the first 5 – 10 years after opening, you usually only need to pay interest or make interest plus principal payments. This flexibility can help you manage your cash flow and allow you to reduce the principal over time, essentially decreasing the amount you owe.

You Only Have To Make One Payment

Managing multiple credit card payments can be overwhelming. With a HELOC, you can consolidate all your accounts into one easy-to-manage monthly payment. Depending on your HELOC terms, this could even lower your monthly payments.

Disadvantages Of Using A HELOC To Consolidate Credit Card Debt

While a HELOC can be a powerful tool for managing credit card debt, it's important to consider potential drawbacks before deciding if it's right for you. Understanding these disadvantages will help you decide whether to use a HELOC to consolidate your credit card debt.

It Uses Your Home As Collateral

One major drawback of a HELOC is that it uses your home as collateral. If you default on the loan, you could potentially lose your home through foreclosure. This risk highlights the importance of careful financial planning and ensuring you can comfortably manage the payment.

Variable Interest Rates

Unlike fixed-rate home equity loans, HELOCs often have variable interest rates. With variable interest rates, your rate fluctuates over time. While your rate may start lower initially, it also means you're at risk for potential rate hikes, which could lead to higher payments over time. Managing this variability requires careful budgeting and monitoring future interest rate fluctuations.

Potential To Increase Debt

Using a HELOC to consolidate credit card debt can free up available credit on your cards. If you watch your spending habits, this isn’t typically an issue. However, if you continue to spend, you could accumulate more debt on your credit cards. This would leave you with both a HELOC and additional credit card debt to repay, potentially putting you in a worse financial situation than before.

Home Equity Will Decrease

Taking out a HELOC reduces the equity in your home. For example, if you owe $200,000 on your primary mortgage and your home is worth $400,000, you have $200,000 in equity. If you get a HELOC for $50,000, your equity drops to $150,000. This is because you subtract the $50,000 HELOC from your original $200,000 equity.

You Must Pay Closing Costs

Similar to getting a mortgage, you usually must pay closing costs. While these costs are typically lower than those for a primary mortgage, they can still add up. On average, closing costs for a HELOC range from 2% – 5% of the total loan amount, depending on the lender and the specific loan product.

HELOCs Vs. Home Equity Loans For Consolidating Credit Card Debt 

When comparing HELOCs to home equity loans as debt consolidation solutions, it often comes down to flexibility versus stability.

HELOCs offer flexibility with variable rates and payment terms. However, like credit cards, it can be easy to spend more than you planned. The variable rates can cause your debt to grow quickly, which is what you’re trying to avoid. On the other hand, HELOCs usually start with a lower interest rate, and they are usually easier to secure than home equity loans.

Home equity loans provide stability with fixed interest rates and predictable monthly payments. However, you start repaying immediately and can face higher closing costs. Keep in mind that with either option, failing to repay your loan could result in foreclosure.

Alternatives To HELOCs For Credit Card Debt Consolidation 

HELOCs are not your only option for credit card debt consolidation. Here are a few other options worth exploring:

• Personal Loans: Personal loans are fixed-rate loans that allow you to consolidate debt with predictable monthly payments. They’re ideal if your total debt is less than the minimum amount required for a HELOC. Additionally, personal loans might be cheaper in the short term since you don’t have to pay closing costs and there are typically fewer fees.
• Cash-Out Refinance: This method involves replacing your current mortgage with a larger one, giving you extra cash to pay off your debt. Using a cash-out refinance could help you qualify for a lower interest rate, depending on your financial situation. For example, if you owe $250,000 on your current mortgage, you could refinance it for $300,000 and get an extra $50,000 in cash. You'll repay this amount with regular monthly payments plus interest.
• Balance Transfer Cards: Balance transfer credit cards usually offer a promotional period with 0% APR on transferred balances. This means you can move your existing credit card balances to a balance transfer credit card. If you plan to pay off your debt in the short term without accruing interest, using a balance transfer credit card could be a viable solution.

Should You Use A HELOC To Consolidate Credit Card Debt? 

The decision to apply for a HELOC to consolidate credit card debt is personal and depends on your financial situation, risk tolerance and long-term goals. It's important to carefully weigh the pros, cons and HELOC alternatives when deciding if it's the right move for you. Consider consulting with a financial advisor to explore your best options.

The Bottom Line

Using a HELOC to consolidate credit card debt can be a smart financial move for some homeowners. It offers the potential for lower interest rates and the convenience of consolidated payments. However, before you decide, take a moment to evaluate your financial goals and consider the pros and cons of HELOCs to see if it's the best debt consolidation option for you.

For more detailed information on HELOCs and other debt consolidation options, visit Rocket Mortgage's home equity line of credit resources.