Credit Cards to HELOCs: Smart Debt Strategy or Just Delay?

In today’s high-cost environment, consumers are increasingly turning to credit cards to get by.

According to government data, Americans now have around $1.2 trillion in credit card debt, a jump of nearly 6% in just the last year. And with the current average credit card rate sitting at over 21%, that debt doesn’t come cheap, either.

It’s likely why more and more consumers, at least those who own homes, are turning to HELOCs to pay off and consolidate credit card debts. These second mortgages allow you to tap your home equity, put those funds toward credit card or other debts, and essentially roll them into a lower-rate loan you can pay off over time.

In 2024, nearly 40% of home equity borrowers used their loans to pay off debts, up from just 25% a year earlier. Is it a move you should consider for your credit card debt, too? Or are the long-term risks and costs just not worth it? Here’s what you need to think about before using a HELOC to consolidate credit card debt.

The upside of moving credit card debt to a HELOC

The biggest advantage of moving credit card debt to a HELOC lies in the interest rate. Right now, the average credit card rate is over 21%. HELOC rates? Those sit significantly lower at around 8%.

Those lower rates not only mean a much lower monthly payment for borrowers, but they equate to more cash flow, too. You can then use that cash to put extra toward your debt, potentially paying it off sooner, or toward achieving other financial goals, like investing or saving for retirement.

“Trading high interest for low interest, dropping the minimum monthly payment by half or more, and freeing up income for investing or accelerating debt repayment are all positive financial developments that can increase your net worth,” says Bruce Maginn, a financial advisor at Solomon Financial.

Lower rates and payments can also make it easier to weather the increasing costs that come with inflation, which has ticked up in recent months, rising from 2.3% in April to 2.7% by July’s numbers.

A risky move for some homeowners

Still, while an interest rate/payment reduction can be tempting, there’s a big risk that comes with trading credit cards for a HELOC, and that boils down to the type of debt they each represent.

Credit cards are unsecured debts, meaning there’s no collateral attached to them. If you fail to make payments, it will send creditors calling and hurt your credit score, but it won’t get your house, car, or other assets seized.

HELOCs, on the other hand, are the opposite. They’re secured debts that use your home as collateral. They could eventually lead to foreclosure if you miss your monthly payments.

“The main risk is turning unsecured debt into secured debt,” says Stephan Shipe, a financial and investment advisor at Scholar Financial Advising. “Your home is now on the line.”

Throw in that HELOCs, like credit cards, have variable interest rates that change over time, and the risk of foreclosure is even higher. If rates rise too much later on, your payments could get out of reach, causing you to fall behind. Miss enough payments (usually four), and your lender will step in and foreclose on the property.

What shuffling debt means for your payoff goals

Most HELOCs have a 10- to 15-year draw period, and during that time, you’re only required to make interest-only payments, meaning just the interest you owe on any money you’ve withdrawn to date.

This can mean a very small payment for those first few years, especially if you’re not drawing out large chunks of money. But it also means you’re never making a dent in your principal, leading to higher payments later on. Depending on how high your balance goes and how much interest you’re being charged, you could even see higher long-term costs than you would have with your original credit card.

To avoid this when using a HELOC to consolidate debts, it’s important to be proactive and aggressive with your payoff efforts. Actively use any interest rate savings to pay down your principal (even during the interest-only period), and put any windfalls you get toward your debts, too, things like tax refunds, holiday bonuses, etc. This can help you save on long-term costs and maybe even pay off your debt sooner, in some cases.

“A HELOC often lowers interest costs compared to credit cards, but the savings depend on disciplined repayment,” Shipe says. “Without it, you may just extend the debt timeline.”

If you’re not disciplined in your spending habits, you could also find yourself racking up debt again, too, starting a cycle of debt that’s hard to get out of.

As Shipe explains, “The shift in debt would free up more room on credit cards, making it easy to increase debt again.”

Who should use HELOCs to pay off credit cards?

Using a HELOC to pay off credit cards is usually going to reduce your interest rate and monthly payment, but that doesn’t mean it’s the right move for everyone. Generally speaking, consolidating debt is only a good idea if you have your spending habits in check. If you’re going to be committed and aggressive in your payoff efforts, then it’s an even better idea and can potentially save you a significant amount of interest in the long run..

“It can be smart if you have stable income, commit to accelerated repayment, have changed your spending habits, and want to consolidate high-interest debt,” Shipe says. “It’s a bad idea if spending habits aren’t under control or you risk only making minimum payments again.”

Not sure if it’s the right move for you? Maginn encourages consumers to be brutally honest when considering consolidating debt with a HELOC.

“Ask yourself, ‘Am I likely to run up my credit card balances again now that I have transferred that debt underneath the roof of my house?’ If so, consider alternative strategies to pay off your credit cards,” Maginn says. “Or ‘Am I likely to re-direct that cash flow to build assets or eliminate other debt or both?’ If so, take this opportunity to increase your net worth. Your future self will be glad that you did.”