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Seasonal expenses can quickly add up. Between food costs, vacations, gift shopping, and hosting (birthdays, holidays, special occasions-it gets expensive fast!) it’s only natural that your credit card balance may end up being higher than you expected. If your spending has spread across several high interest credit cards, you may be feeling a little overwhelmed right now. Consolidating these credit card debts to a lower interest rate can be instrumental in paying down debt. One way you can accomplish this is by using a home equity line of credit (HELOC).
A HELOC is credit that is secured against the equity in your home, typically known as a second mortgage. It works similarly to a credit card in that it’s a revolving line of credit you can borrow from as needed and has a longer repayment period.^ Unlike many credit cards, the interest rate tends to be relatively low, making it a great option for debt consolidation. However, remember to take into consideration that HELOC rates are usually variable and if the Federal Reserve increases rates your rate may increase as well, meaning a possible higher payment. Utilize your HELOC to pay off current debts, and establish a consolidated source of debt with a favorable interest rate – it also allows you to more easily track your debt and due dates for payments.
^When borrowing against your HELOC balance, keep in mind that while you have a longer repayment period you are still required to make the monthly minimum or interest-only payments. Always be sure to carefully review your repayment terms before you begin utilizing your balance.
Using a HELOC to consolidate credit card debt may help you avoid increasing your credit utilization with other higher interest rate loans. In their place, you’ll have a single HELOC payment. Utilizing your HELOC to pay off credit card balances, while still keeping the credit card accounts open at a zero balance, may help improve your credit utilization, or how much of your available credit you’re using. Additionally, a HELOC has a draw period and a repayment period of 10 years or more, making it easier to pay off debt at your own pace. However, waiting to repay the debt back until the repayment period and making interest-only payments during the draw period could lead to deeper debt.
There are many perks to using a HELOC for credit card consolidation, but you should be aware of the potential risks involved. For example, a HELOC uses your home as collateral. So, if you fail to repay your HELOC, you risk foreclosure on your home and taking a credit hit. If property values drop, you could end up owing more than it’s worth. Also, because a HELOC can effectively wipe out your credit card debt, it’s easy to find yourself falling back into old spending habits. After some time, you may have new credit card debt while still needing to pay off your HELOC. Lastly, some institutions may charge origination fees or an annual fee. Review your options and consider the pros and cons when making the right decision for your financial well-being.
Before choosing a HELOC to help with your credit card debt, carefully consider your strategy for repayment. If you’re unsure whether a HELOC is the right solution for your seasonal spending debt, speak with a BALANCE Financial Counselor. They can work with you one-on-one to help with your financial needs. Learn more on our website, or call a Financial Counselor at 888.456.2227.
This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.
*Earn More is a sweep feature. Eligible balances are automatically swept out to FDIC and/or NCUA insured deposit accounts held at participating financial institutions throughout the country. You will still have access to your checking account funds. The feature becomes activated on the first of the month following the month enrollment took place. The feature can only be added to one checking account per membership, excluding HSA Checking accounts. Learn More about the Earn More Feature here.