Paying Off Credit Cards With A Home Equity Loan Or HELOC

9 Min Read
Published May 14, 2024
FACT-CHECKED
Couple looking at credit card statements and home equity loan paperwork.
Written By T.J. Porter
Reviewed By Tom McLean

Credit card debt is a problem for a lot of Americans. Total credit card balances in the United States exceeded $1 trillion in 2023

— that’s just under $3,000 in credit card debt for every American.

Dealing with credit card debt can be stressful and expensive. Some homeowners consider borrowing some of their home equity to pay off high-interest credit cards and consolidate their debt into a single payment. But before you sign up for a home equity loan or home equity line of credit, you’ll need to understand the pros and cons of borrowing equity to pay off credit cards.

Key Takeaways:

  • Borrowing home equity to pay off credit cards can simplify your finances and save you money on interest.
  • To use a home equity loan or HELOC for debt consolidation, you need to have equity in your home and be in good financial shape.
  • Alternatives for consolidating debt include personal loans, balance transfers, cash-out refinancing and getting a 401(k) loan.

Why Use Home Equity To Pay Off Credit Cards?

Using home equity to pay off credit cards can save you money and simplify your finances. These are common reasons why homeowners borrow equity to consolidate credit card debt.

You Can Simplify Your Finances

According to Experian, the average American has more than three credit cards. That means they receive three interest-accruing bills each month and must make three payments.

Consolidating multiple credit cards into a home equity loan or a HELOC combines those debts into one monthly payment. That can make it easier to keep track of your overall debt and simplify your finances by reducing the number of bills you have to pay.

You Can Save Money On Interest

Another advantage of using home equity to pay off your debts is that the interest rates for borrowing equity are much lower than those charged by credit cards.

In 2023, the average interest rate for a credit card was 22.8%. As of April 2024, the average interest rate for all home equity loans was 8.63%. Using those average interest rates, paying off $10,000 in credit card debt with a home equity loan over five years would save you about $4,500 in interest.

The rates are lower because equity loans are secured by the value of your home, which reduces the lender’s risk. Credit cards are unsecured debt, so lenders charge higher rates to compensate for the additional risk.

You May Qualify For Tax Benefits

Under the Tax Cuts and Jobs Act of 2017, interest payments on home equity loans and HELOCs are tax deductible only if the proceeds are used to buy, build or improve a home. You can’t deduct the interest payments if you use those loans to consolidate debt.

That law expires in 2025. When it expires, homeowners would be free to use a home equity loan to consolidate debts and deduct what they paid in interest from their taxes.

What’s Your Goal?

What To Consider Before Using Home Equity To Pay Off Credit Cards

To decide if using home equity to pay off your credit card debt is the right move, you’ll need to consider your options and understand the benefits and risks.

Evaluate Your Financial Situation

You’ll want to review your financial situation to make sure you know how much credit card debt you have, how much equity you have, and how much room you have in your budget for the payments.

If you have savings, using that money to pay off your credit cards may make more sense than borrowing home equity. You’ll save money on interest and avoid the fees and the hit to your credit score that applying for a home equity loan or HELOC can cause.

Similarly, if you don’t have that much credit card debt, paying it down aggressively may be a better option than getting a home equity loan.

Choose Between A Home Equity Loan And HELOC

If you decide that borrowing home equity to consolidate your credit card debts is the right move, you’ll need to choose between a home equity loan or a HELOC.

Home equity loans give you the cash in a lump sum. They typically have fixed interest rates but may come with closing costs or other fees.

HELOCs give you access to a line of credit, much like a credit card. You can pull from the line of credit whenever you need to and make multiple draws from the line of credit. That gives HELOCs more flexibility, but they often have variable interest rates and may have annual fees.

Home equity loans are likely the better choice for paying off credit card debt because you get the money in a lump sum and can’t take out additional funds. But a HELOC is a better fit if you want the flexibility to draw cash from your home equity multiple times, such as for future home improvement projects.

Research Loan Terms And Fees

You’ll want to contact several lenders and compare their terms, fees and interest rates. You should look for the loan with the lowest total cost when considering both interest and fees while still having an affordable monthly payment. Keep in mind that loans with a longer term will have a lower monthly payment but will cost more overall.

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Pros And Cons Of Using Home Equity To Pay Off Credit Cards

Borrowing your home equity can help you pay off credit card debt, but it’s important to consider the drawbacks.

Pros

Some benefits of using home equity to pay off credit card debt include:

  • You have fewer bills to pay. You can consolidate multiple credit card bills into one loan payment.
  • You can save on interest. Home equity loans and HELOCs usually have lower rates than credit cards, so you’ll pay less interest.
  • You may improve your credit. Paying off your credit cards with a home equity loan may improve your credit score by lowering your credit utilization ratio.

Cons

Drawbacks of paying off credit card debt with home equity include:

  • You have to pay fees. HELOCs and home equity loans often involve fees, which can eat into your savings.
  • You’re trading unsecured debt for secured debt. According to Jay Zigmont, Founder of Childfree Wealth, you are turning unsecured debt (credit cards) into secured debt (HELOC on your house). “Essentially you are remortgaging your house to pay down your credit cards,” he says.

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Alternatives To Using Home Equity To Pay Off Credit Cards

Tapping your home equity is one strategy for paying off credit card debt, but it isn’t the only one. You also might consider these alternatives.

Personal Loan

You can use a personal loan for any purpose. Personal loans are generally unsecured and offer fixed interest rates. They usually are available for any amount from a few thousand dollars to $40,000 or more, and have repayment terms of two to seven years.

Interest rates on personal loans are generally lower than credit card rates, though higher than a mortgage or home equity loan. The loans have repayment terms of two to seven years. A personal loan would allow you to consolidate your credit card debt to a loan with a lower interest rate that would save you money without having to qualify for a mortgage or use your home as collateral.

Balance Transfer

Many credit card issuers offer interest rate promotions to new customers. These often allow you to pay no interest on your balance for a certain period, typically six to 18 months. After the promotional period ends, you’ll pay the standard interest rate.

If you have solid credit, you can apply for one of these cards, transfer your balances to the new card, and work toward paying off the balance before you have to pay interest.

If you’re considering this option, shop around for the most extended no-interest term and check if the card charges a balance transfer fee.

Cash-Out Refinance

Instead of applying for a home equity loan or HELOC, you could apply for a cash-out refinance. A cash-out refinance involves replacing your current mortgage with a new loan based on the current value of your home. You get to keep the difference between what you borrow and what it takes to pay off your current mortgage, and you can use that money however you like — including paying off your credit cards. You repay the cash you borrow as part of your new mortgage payment.

A cash-out refinance can work well if you can get a better interest rate than you have on your existing mortgage, but it isn’t going to save you money if your new mortgage has a higher rate.

401(k) Loan

A 401(k) loan involves borrowing money from your retirement account and using it for other purposes. While a 401(k) loan lets you avoid the early withdrawal penalties involved with taking money from a retirement account, it isn’t a free lunch. You have to treat it like an actual loan and pay yourself back.

Keep in mind that you’ll miss out on potential investment gains while you have the money out of your retirement plan. You may also face major pitfalls. For example, some plans require that you immediately pay back any outstanding 401(k) loans if you leave your job.

FAQ

Here are answers to common questions about using a home equity loan to pay off credit card debts.


If you have a lot of credit card debt, it can do a number on your credit score. Having poor credit can make it harder to qualify for any type of loan, including home equity loans. The good news is that because home equity loans are secured, they’re often easier to get than unsecured loans.

There isn’t a set minimum credit score that you need to qualify for a home equity loan or HELOC. Each lender is free to set its own requirements. Many lenders have a minimum credit score of 620, but you’ll have an even better chance with a score of 680 or higher.

Whether you should tap your home equity to pay off debt depends on your financial situation. If using your home equity can save you a lot of money in interest and you don’t have the savings to pay off the debt, it can be a good idea. You just need to avoid racking up credit card debt again and putting yourself back in the same situation.

The Bottom Line

For many people, home equity loans and HELOCs are both good ways to get cash out of your home equity. However, it’s important to have a plan.

“If you are going to use a HELOC or other loan to consolidate your credit card debt, make sure you have a plan to stay out of new credit card debt,” Zigmont says. “You need to look at what caused the credit card debt in the first place and make sure your budget and behaviors have changed to end the debt cycle.”

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