Credit Cards vs. HELOC
Choosing Between a Credit Card and Home Equity Line of Credit
When paying off high-interest debt, you may be faced with the question of whether to pay the balance down bit by bit, or consolidate it into a new loan with a lower rate. And furthermore, when consolidatinge to save money on interest payments, do you choose a credit card or an Equity Line of Credit (HELOC)?
Let’s break down each option.
Credit Cards
When consolidating a high-interest debt to a credit card, it’s important to consider whether the credit card APR (Annual Percentage Rate) is lower than the current rate on the debt you’re consolidating. Even if it’s just for an introductory period, a lower APR could save you money over the short term. However, as with any introductory offer, the low-rate period will eventually end. If you plan to pay off the consolidated debt within that introductory period, you’ll likely come out ahead.
Finding a credit card with a low, everyday APR can also be a good way to consolidate high-interest debt. Just remember, some cards charge a balance transfer fee. Once you’ve paid off the consolidated debt with your credit card, put the card away so you’re not tempted to use it. Or close the account entirely.
Home Equity Line of Credit
If you have equity in your home, you may have the option of opening a HELOC. Unlike a credit card, a HELOC is like borrowing money from yourself. For example, if you open a $20,000 equity line of credit, you’ll be borrowing money from your home’s equity value every time you use that account. In the end, you’ll pay back any balance you use plus some interest.
When you consolidate high-interest debt to your HELOC, that balance will be locked at a set APR or remain variable depending on the loan. While most HELOC accounts remain active for up to a decade or longer, you don’t want to prolong the payback period. Instead, consider making larger monthly payments to pay off the balance in 12 to 24 months.
| Product Type | The Good | Things to Watch |
|---|---|---|
| Credit Cards | Low, introductory rates No balance transfer fees Builds your overall credit (as long as you don’t have too many cards and available balances) |
Interest rates after the introductory period Too much open credit can affect your overall credit rating Fees for balance transfers Adding to the balance with additional purchases and expenses |
| Home Equity Line of Credit | Variable rates (means the rate could drop) Easy access puts you in control Account remains available after you’ve paid off the consolidated balance |
Variable rates (means the rate could go up) Minimum, initial advance could make some consolidations difficult Adding to the balance with additional purchases and expenses |