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How to Consolidate Credit Card Debt With a HELOC

How to Consolidate CC Debt With a HELOC
Fiona Staff1/6/2023

According to a recent study from Experian, the average credit card account has a balance of $5,221. Based on data from the Federal Reserve, though, the average credit card also has an interest rate well into the double digits, which can cost cardholders thousands of extra dollars over the course of their debt repayment. 

Carrying a balance on one or more credit cards isn’t uncommon, but it can be very costly. Rather than spending years trying to pay down high-interest debt — and wasting seemingly-endless amounts of money on finance charges — there are some lower-cost alternatives to consider. 

For example, a HELOC  may be a great option if you own your home. Here’s how it works and some ways you can consolidate your credit card debt with a HELOC. 

What is a HELOC?

A home equity line of credit, or HELOC, is an open-ended line of credit that is secured by the equity that you own in your home. Your available equity is calculated based on the current market value of your home minus any existing liens on the property such as a remaining mortgage balance.

Depending on the lender you choose, you may be able to take out a line of credit for as much as 70% to 90% of your home’s value, minus what you owe. With a HELOC, you can then withdraw funds from this line of credit as needed during a draw period, which typically lasts for 10 years. 

Borrow as much or as little as you need during this time; typically you can make interest only payments during the draw period but this may vary by lender.

Once the draw period ends, you’ll begin repaying the principal balance due as well as interest; this repayment period usually lasts between 15 and 20 additional years. 

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How to Use a HELOC to Pay off (and Consolidate) Credit Card Debt

A home equity line of credit can be used to pay for any number of things. You can make large purchases, fund a home renovation, provide yourself with a financial safety net in case of emergencies, or yes, consolidate existing debt such as student loans or credit card balances.

The average credit card interest rate is now in the double digits. Depending on your statement balance and how much you pay toward your account each month, your credit card debt could wind up costing you thousands — if not tens of thousands — of extra dollars over the course of your repayment. 

By pulling money from a HELOC and using those funds to pay off credit card balances, you are essentially consolidating and refinancing those debts. The best part? The typical HELOC interest rate is a mere fraction of what most credit cards charge, so you can potentially get out of debt for less interest.

Additionally, by paying off your revolving debt (i.e.: credit cards), you will free up your credit utilization on those accounts. This can serve to improve your credit score quickly and, in some cases, drastically. And the better your credit score, the more access you’ll have to helpful financial products and services, and the better the interest rates you’re offered on future products.

You aren’t limited to consolidating and refinancing your credit card balances, either. You can consolidate all of your outstanding debt with a HELOC, even if that means combining credit cards with an auto loan balance, outstanding personal loan, and/or remaining student loans. As long as you have the available credit in your HELOC limit, there are several possibilities.

Bottom Line

If you are a homeowner with equity in your primary or secondary residence, a home equity line of credit can be a great way to access cash that can then be used to pay off debt, such as credit cards. Rather than continue paying high interest rates on these revolving accounts, a HELOC can help you refinance and consolidate those balances into a lower interest debt, saving you both time and money in the long run.

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