Should You Use a Line of Credit for Credit Card Debt Relief?

Owning a home is kind of like having a big piggy bank. You’ll accrue equity in the house as property values rise and you pay down your mortgage. This asset can then be tapped in a few different ways, one of which is a home equity line of credit (HELOC). 

“People with significant credit card debt will sometimes use a HELOC to “pay it off”. However, there are some considerations to ponder before going this route, one of which is extremely consequential.” 

This raises the question; should you use a line of credit for credit card debt relief? 

Well, let’s take a look. 

How a Home Equity Line of Credit Works

Perhaps best thought of as an ongoing pre-approved loan, a HELOC enables you to spend against a percentage of the equity in your home. Let’s say you have $800,000 worth of equity in a house worth $900,000, and you get a 50 percent HELOC.

That’s like having a credit card with a $400,000 limit.  

HELOCs run for about 25 years in most cases, during which you’ll have “draw” and “repayment” intervals. You can spend from the HELOC during the draw period all you’d like – up to your limit — but you’ll be required to start remunerating the lender during the repayment period. 

Interest accumulates during both. 

How to USE a HELOC on Credit Card Debt

The first step is to get the total payoff amounts from each of your card issuers as of a specific date. Add up the totals, draw that amount from your HELOC, use those funds to pay off the cards and you’re in business. 

The key is to make sure you get the exact payoff as of a certain date and meet that deadline. Otherwise, the phantom interest could accrue and you could find yourself with balances on those cards of which you were unaware. 

Why Go This Route?

The biggest benefit here is the interest rate on that HELOC is going to be much lower than any credit card in existence. This is because you’re taking a sort of a second mortgage out on your home, so you’ll pay near home loan interest rates. 

As an example, credit card APRs (as of this writing) average 17 per cent. HELOC rates are currently averaging somewhere around six. You’ll save a lot of money paying off your cards this way. Plus, these savings will help you pay those debts off faster. 

OK, So What’s the Downside?

You could be setting yourself up for an even bigger debt load. 

Take a good look at what led you to need to do this to satisfy your creditors. Was it an unexpected emergency to which you needed to respond quickly? If so, you’re unlikely to see a recurrence of that situation. Get the HELOC, pay it back and you’ll be OK. 

On the other hand, if you just had to have those new Prada shoes, which of course meant you had to get that Prada suit, which of course meant you had to… 

See where this is going?

You should look for another form of credit card debt relief if spending profligately got you into this situation. That stack of credit cards with zero balances will tempt you into running them up again after you use a HELOC to pay off those accounts. However, this time you won’t have the HELOC upon which to fall back. And, you could lose your house if your bills are so high you can’t repay them and the HELOC.