11 Oct Using a HELOC for credit card debt

Q. I have $10,000 in credit card debt and I can’t seem to pay more than the minimum. I’m thinking of using my HELOC which I have never used to pay it off. Are there any downsides?
— Debtor

A. Before we figure out the best way to pay off your credit card debt, we should take a deeper look at why you are carrying credit card debt in the first place.

You may benefit from a simple cash flow exercise in order to confirm whether your spending is covered by the amount of income you have, said Taylor Thomas, a certified financial planner with Round Table Wealth Management in Westfield.

He said you should also review the monthly credit card statements in order to see if your balance has been going up.

“If you have only been paying the minimum payment, it is likely that your balance might be increasing as the minimum payment usually doesn’t cover the monthly interest charges,” he said. “Once you have a good handle on your cash flow you can look to the options available for paying the debt off.”

Thomas said a home equity line of credit (HELOC) can be a beneficial way to pay off high-interest rate credit card debt.

The average interest rate for a credit card is currently about 16.31 percent according to BankRate.com, while home equity line of credit rates are usually variable based on the Prime rate (published by the Wall Street Journal) and may have a floor and maximum rate. Current HELOC rates (based on an excellent credit rating) are around 3 percent, Thomas said.

He offered this example: Using simple math, if you have $10,000 of credit card debit you could save about $1,300 ((16%-3%)*$10,000) in annual interest costs if you were to pay off your credit card debit using your HELOC, assuming your HELOC rate is currently about 3 percent.

Additionally, he said, the interest you pay on your HELOC balance — up to a maximum balance of $100,000 — is tax deductible.

“It is important to keep in mind that the HELOC interest rate is variable and while it may be very low right now, things could change,” Thomas said. “As interest rates rise, so will your monthly payment and you may find yourself in a position similar to the one you are in now.”

He said your goal should be to have the equity line balance paid down by the time the line expires.

A HELOC usually has an expiration date, which you will want to know before you use it, he said. The balance on your HELOC needs to paid off by expiration or you will need to be approved for a new HELOC and transfer the balance over.

“You may also want to consider using a home equity loan which will enable you to define the term and lock in a fixed interest rate,” he said. “Given that interest rates are on the rise this may be another viable option to choose from.”

But most importantly, Thomas said, you should evaluate your annual income and compare this figure to your spending in order to make sure that you are not spending more than you earn.

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This post was first published in October 2016.