Can You Pay Off a HELOC With a Credit Card?

A Home Equity Line of Credit, or HELOC, allows homeowners to borrow against the equity in their home. It functions similarly to a revolving credit line, providing access to funds as needed, up to a certain limit. This financial tool is often used for significant expenses, such as home renovations or education costs. Many individuals wonder if a credit card can be used to pay off a HELOC.

Feasibility of Payment

Using a credit card to pay off a HELOC can be attempted through two primary methods: balance transfers or cash advances. A balance transfer involves moving debt from one credit account to another, often to take advantage of lower promotional interest rates. However, credit card companies typically do not permit balance transfers to secured debts, such as a HELOC, because it is secured by real estate. A balance transfer fee, typically ranging from 3% to 5% of the transferred amount, would also apply.

The second method involves taking a cash advance from a credit card. This allows you to withdraw cash, which could then be used to make a payment on your HELOC. Cash advances generally come with immediate and high interest rates, often significantly exceeding the rate for standard purchases. There is no grace period for cash advances, meaning interest begins accruing from the transaction date. Cash advance fees, which can be a flat fee or a percentage (often 3% to 5% of the amount advanced), are commonly charged.

Financial Implications of Using a Credit Card

Using a credit card to pay off a HELOC carries significant financial disadvantages. Credit card interest rates are almost always considerably higher than HELOC interest rates, which are typically tied to an index like the Prime Rate and can range from 7% to 10% or more. In contrast, average credit card Annual Percentage Rates (APRs) can range from 20% to 30% or even higher, especially for cash advances. This substantial difference means that transferring HELOC debt to a credit card would drastically increase the total cost of borrowing.

Beyond higher interest, fees add to the financial burden. Balance transfer fees typically run between 3% and 5% of the transferred amount. Cash advance fees can also be 3% to 5% of the amount advanced, often with a minimum charge of $5 or $10. These upfront costs increase the total amount owed without reducing the principal.

A HELOC is a secured debt, backed by your home as collateral, which helps lenders offer lower interest rates. Paying off a HELOC with an unsecured credit card transforms a secured loan into an unsecured one. This removes the collateral that provided a lower interest rate, eliminating the benefit of a secured loan. Your home is no longer directly tied to the debt, but the debt itself becomes much more expensive.

Carrying a large balance on a credit card, especially one that results from a HELOC payment, can negatively impact your credit score. Your credit utilization ratio, the amount of credit you are using compared to your total available credit, significantly influences your score. A high utilization ratio, generally anything above 30%, can lower your score. This can make it more difficult to obtain new credit or favorable interest rates on other loans in the future.

High interest rates, fees, and a lack of collateral can lead to a compounding debt cycle. Each month, a larger portion of your payment goes towards interest and fees rather than reducing the principal. This makes it challenging to pay down the debt and can trap individuals in a difficult financial situation.

Understanding Your HELOC Debt

HELOCs typically feature variable interest rates, meaning the rate can fluctuate over time. These rates are usually tied to a publicly available index, such as the U.S. Prime Rate, plus a margin. Changes in the Prime Rate directly affect your monthly interest payments, which can lead to unpredictable payment amounts.

A HELOC usually consists of two distinct phases: the draw period and the repayment period. During the draw period, which can last for 5 to 10 years, you can access funds. Payments might be interest-only, meaning you are not reducing the principal balance. Once the draw period ends, the repayment period begins, and you typically can no longer draw funds. During this phase, you are required to make principal and interest payments, which can result in significantly higher monthly obligations.

Other Strategies for Managing HELOC Debt

Instead of using a credit card, other strategies exist for managing HELOC debt. One option is to refinance your HELOC, potentially converting it into a fixed-rate home equity loan. A fixed-rate loan provides predictable monthly payments, removing the uncertainty of variable interest rates. Alternatively, you might consider refinancing your primary mortgage to include the HELOC balance, which could result in a single, consolidated mortgage payment.

A debt consolidation loan, often an unsecured personal loan, could be used to combine your HELOC and other debts into a single payment. While this can simplify your finances, compare the interest rate of the consolidation loan to your existing HELOC rate. Unsecured personal loan rates can vary widely based on your creditworthiness, and they may still be higher than your HELOC rate.

Implementing a strict budget and committing to increased payments can also be an effective strategy. By analyzing your income and expenses, you can identify areas to reduce spending and free up additional funds. Directing these extra funds towards your HELOC principal can accelerate repayment and reduce the total interest paid over time. Making payments larger than the minimum required can significantly shorten the repayment period.

For complex financial situations, seeking guidance from a non-profit credit counseling agency can be beneficial. These organizations offer free or low-cost advice on debt management, budgeting, and creating repayment plans. They can help you explore options tailored to your circumstances and provide structured support for managing your debt.