Is it risky to use a HELOC to pay off credit card debt?

Paying down credit card debt is definitely worth pursuing, and could help substantially improve your finances. But how should you go about doing this? 

A HELOC, or home equity line of credit, is a common option for homeowners. If you qualify, you may be able to lower the cost of your debt. Not everybody thinks it’s a good idea to use a HELOC to pay off credit card debt. And in fact no financial solution is right for everyone.

Let’s explore the pros and cons of using a HELOC to pay off credit card debt, and the red flags to watch out for.

When is it smart to use a HELOC to pay off credit card debt?

Consider getting a HELOC to pay off credit card debt when you can get at least one (or possibly all) of these benefits:

• A lower monthly payment and immediate relief on your budget. This could happen if you get a lower interest rate, and you use your HELOC to consolidate multiple debts. The new payment could be lower than all of the minimum payments you’re making now.

• A payment plan that lets you clear the debt faster compared to your current timeline. This could happen, for example, if you get a lower interest rate but keep making the same payments.

• A fixed interest rate that isn’t subject to changes in the economy. One big disadvantage of credit cards is that the rates fluctuate. Rising rates are painful for people who have variable-rate debts. A fixed rate means you’ll know what the rate is, period.

A HELOC could streamline your finances and make it easier for you to manage your debt, especially if you use it to pay off multiple debts.

One of the best features of a HELOC is that you only have to borrow as much as you need, even if your lender approves you for a higher credit limit. Initially, there may be a minimum amount that you have to draw, but then whether you borrow up to your limit is up to you.

Some scenarios make more sense when borrowing from a HELOC.  

When you may want to consider other options

A HELOC isn’t the only option that could give you some breathing room in your debt payments. And it may not be helpful if you seriously struggle with payments or your finances in general.

You’re at risk of running up more debt

Paying off your credit cards with a new loan has one potential pitfall that you don’t want to fall into—more debt. 

Once you pay off your credit cards, you free up their credit limits. If you run up new balances, you could end up with even more debt than you started with.

When you get a HELOC to pay off your credit cards, have a plan for how you’ll handle your debt going forward. It might not be a bad idea to close down the credit card accounts once they’re paid off. If you feel like you need to keep one credit card around, avoid saving the account number on shopping sites, and don’t carry the card with you.

You can’t afford the required monthly payment

Getting out of debt generally isn’t quick or easy. If you’re really struggling, a new loan might not help you. If you genuinely can’t afford to fully repay your debts, you might want to consider negotiating with your creditors to reduce the amount you owe. Or you could check if a professional debt resolution company could negotiate for you.

Credit card issuers want you to repay what you owe, but they may be willing to be flexible if you’re experiencing a financial hardship. Resolving debts doesn’t mean walking away from them. You’ll still need to pay something. But the amount of money you set aside toward resolving debts could be an affordable amount that’s less than the total of your current required minimum payments. 

You’re thinking about bankruptcy

The following is for informational purposes only and not to be construed as legal advice. If you have any questions about bankruptcy, you should consult with a licensed attorney.

If you’re considering bankruptcy, you might not want to pay off your credit card debt with a HELOC. 

A HELOC is secured debt, which means there’s collateral involved. Collateral is something valuable that protects the lender from losses in case you can’t repay your loan. In this case, the collateral is your home. If you can’t repay your HELOC, you could lose your home.

Bankruptcy is a legal process for dealing with debt. In a Chapter 7 bankruptcy, you may be able to walk away from your unsecured debts like credit cards or personal loans. You could also be relieved of your secured debts, but you would lose the asset the secured debt is tied to. In other words, you would lose your home if you asked a bankruptcy court to discharge (forgive) your HELOC debt. 

Should you pay off your credit cards with a HELOC?

This is a question only you can answer, perhaps with the help of a qualified financial professional. 

If you’re doing fine, can afford your bills, can qualify for a HELOC, and could potentially save money and get ahead by using a HELOC for debt consolidation, it may be time to talk to a mortgage advisor about your options.

Next steps

• Calculate exactly how much you need to borrow.

• Get a rate quote from a lender who does a soft credit check (one that won’t hurt your credit score).

• If a HELOC isn’t the right fit, consider professional help to find other options to pay down your credit card debt.