Should I Consolidate Credit Card Debt with a HELOC

Debt consolidation is the process of refinancing debt from multiple creditors into a single monthly payment with a new, lower interest rate. Tapping into your home’s equity by using a home equity line of credit (HELOC) is one of the best ways to consolidate high-interest debt. 

BluCurrent Credit Union in Springfield, Missouri offers competitive rates on home equity lines of credit. Read on to learn whether debt consolidation with a HELOC is right for you. 

Benefits of Consolidating Debt with a HELOC

• Lower interest rate. Since you’re using your home as collateral, your interest rate will likely be far lower than most other types of loans. 
• Potential future borrowing. You don’t have to use your entire line of credit; rather, you draw from it and pay on it bit by bit, making your funds available again.
• Credit score boost. Reducing high-interest debt balances by transferring them over with a home equity line of credit can boost your credit score over time. 
• Smaller payments over a longer loan term. Paying down your debt can seem far easier and more manageable month by month. 
• Streamlined payment. It can help you see the light at the end of the tunnel as you chip away at multiple debts with one easy monthly payment. 

The Drawback of Consolidating Debt with a HELOC

When consolidating debt with a HELOC, your home is used as collateral. For most people, that’s not an issue. But if you have undisciplined spending habits and fail to make consistent payments, you risk foreclosure. 

HELOCs have variable rates. So, the amount you pay on your credit line can change based on market factors.

What Does a Home Equity Line of Credit Do? 

It’s not to be confused with a home equity loan, in which part of your home’s equity gets turned into a secondary loan, given out in one lump sum. The HELOC functions like a credit card. 

You’re given a line of credit to draw from that’s based on your home’s equity. Assuming your credit score is decent, you can almost always get a lower interest rate than you would with a personal loan. 

Is Debt Consolidation Right for Me? 

If you have high-interest debts from multiple creditors — then, yes — you would benefit from debt consolidation. If that isn’t you, stick to paying off your debt at regular intervals.

Stay cautious and disciplined with your spending habits. For those struggling with debt repayment, BluCurrent has tips on how to pay off debt quickly.

What Debts Can Be Consolidated with a HELOC?  

You can consolidate nearly any type of debt with an equity-based line of credit or loan. It's common to use it on credit card debt or for paying off a car loan. 

However, most lenders recommend HELOCs be used for home improvements and updates rather than for unsecured personal debt. Plus, when you use a HELOC for your home, you get end-of-year tax benefits - which is an extra bonus. 

Who Shouldn’t Consider Debt Consolidation via HELOC?

Ironically, the very people who need to consolidate debt the most tend to have lower credit scores. As a result, they don’t qualify for a lower interest rate and ultimately can’t benefit from debt consolidation.

As you consider consolidating your debt with your home’s equity, take a look at other options you might have available: 

1. Zero Balance Transfer Fee Credit Card: allows you to transfer higher interest debt to one credit card without paying a fee. 
2. Debt consolidation mortgage/refinance: it’s when you take out a new home loan and borrow more than you currently owe on the house, then use the rest of the loan for other debt. 
3. Personal Loan: typically higher interest rates compared to a HELOC.
4. 401(k) Loan: borrowing from your own retirement by removing money from it permanently. If you lose a job, this must be repaid within 60 days. 

Three Steps Before Consolidating Debt with a Home Equity Line of Credit 

1. Determine how much equity you actually have in your home. You can calculate the equity in your home pretty easily. Compare the smallest loan amount you could get to the outstanding debt you currently have. Will the equity cover it? 
2. Check your credit score. See whether or not you have a strong enough credit score to qualify for a favorable interest rate on your loan. If your credit score is too low, take steps toward improving your credit score or talk with your mortgage lender about it.
3. Compare loan options from various lenders. Once you’ve found one that offers good terms and a fair monthly payment, pick which loan you want to apply for. Working with a financial advisor can help you qualify what options are the best for you. 

Apply for a Home Equity Line of Credit at BluCurrent

Take advantage of a HELOC from BluCurrent today. Get started with our easy online loan application or contact one of our experienced mortgage team members to discuss options today. Enjoy competitive rates, friendly service, and more!