Should You Use Your Home Equity To Pay Off Credit Card Debt? What Homeowners Need To Know

Credit card debt can quickly become overwhelming, especially when high interest rates make it difficult to reduce your balance even as you make payments. While Experian reports that the average credit card interest rate is 19.35% as of July, rates can reach nearly 30%. If you're only making minimum payments, it can be difficult to keep up.

Your home's equity may offer a way to manage that debt. By borrowing against your home equity, you may be able to pay down or eliminate your credit card balance and potentially reduce the amount you're paying in interest. But using an option such as a home equity line of credit (HELOC) also puts your home on the line.

If you're struggling with credit card debt but have equity in your home, you have options. Before you tap your home equity, make sure you understand how each option works and the risks involved.

When using home equity to pay off debt makes sense

Using home equity to pay off credit card debt can make sense in certain situations. If you have credit card debt with an APR of 20% or higher, for example, a HELOC or home equity loan may offer a lower interest rate and reduce the amount of interest you pay.

But interest rates aren't the only factor to consider. If you can't make the payments on a HELOC or home equity loan, you could potentially lose your home. Before borrowing, make sure the payments comfortably fit your budget and you have a clear plan for paying off the debt.

You'll also need enough home equity to qualify. Many lenders limit how much of your home's value you can borrow against, often requiring you to retain a certain amount of equity in the property.

For example, say your home is worth $400,000 and you owe $250,000 on your mortgage. That gives you $150,000 in equity. If your lender requires you to maintain 20% equity, or $80,000, you may be able to borrow up to $70,000 of your available equity, depending on the lender's requirements and your qualifications.

Compare your options before borrowing

There are several ways to pay down credit card debt, including options that let you borrow against your home equity. Each comes with different costs, requirements and risks, so it's important to compare them before deciding which approach is right for you.

Both a HELOC and a home equity loan use your home as collateral. With a HELOC, you can borrow from a revolving line of credit as needed, up to your approved limit. A home equity loan, on the other hand, provides a lump sum that you repay over a set period.

The biggest downside: You're putting your home on the line

HELOCs and home equity loans are forms of secured debt and typically have lower interest rates than credit cards. But that lower rate comes with a significant risk: Your home serves as collateral. If you fall behind on payments, you could face foreclosure and potentially lose your home.

Even if you have a solid repayment plan, consider how an unexpected job loss, medical bill or other major expense could affect your ability to make payments. HELOCs come with another consideration: They typically have variable interest rates, meaning your rate and monthly payment could increase over time.

Using a HELOC or home equity loan also doesn't address the reason you accumulated credit card debt in the first place. Before taking on new debt to pay off your credit cards, consider what led to the balances and whether you've addressed the underlying issue.

Questions to ask before using your equity

If you're on the fence about using your home equity, these questions may help you decide:

• Can I realistically pay this off? Make sure the monthly HELOC or home equity loan payment comfortably fits into your budget, with room for other expenses.
• Will my monthly payment decrease? Depending on your credit card balance and interest rate, switching to a HELOC or home equity loan may result in only a small reduction in your monthly payment, or none at all.
• Am I solving a temporary problem or creating a bigger one? Consider what caused you to accumulate credit card debt and whether you've addressed that issue before taking on new debt to pay it off.
• Is my income stable? Consider whether you could continue making payments if your income dropped or you unexpectedly lost your job.
• Do I have an emergency fund? Ideally, have enough savings to cover three to six months of living expenses so an unexpected expense doesn't interfere with your debt repayment plan.

Alternatives that may be safer

Using home equity isn't right for everyone, and there are several alternative options that may be safer:

• Debt consolidation loan: A debt consolidation loan lets you combine multiple debts into a single loan with one monthly payment. If you qualify for a lower interest rate than you're currently paying, you could also save money on interest. Compare rates, fees and repayment terms before applying.
• Balance transfer credit card: A balance transfer card may offer a 0% introductory APR for a limited time, allowing you to pay down your balance without accumulating additional interest during that period. Most cards charge a balance transfer fee, and any remaining balance may be subject to a much higher APR once the promotional period ends.
• Debt avalanche method: If you have multiple debts, the debt avalanche method can help minimize interest costs. Make the minimum required payment on each debt, then put extra money toward the debt with the highest interest rate. Once that's paid off, move on to the debt with the next-highest rate.
• Credit counseling: A nonprofit credit counseling agency can help you review your finances, create a budget and develop a plan for paying down debt. Depending on your situation, a counselor may also discuss whether a debt management plan is appropriate.
• Budget adjustments: Look for expenses you can temporarily reduce and redirect that money toward your credit card balance. Even smaller cuts to discretionary spending, such as dining out or entertainment, can give you more money to put toward debt each month.

Your home equity can be a valuable financial tool, but it isn't free money. Borrowing against it means taking on new debt and putting your home at risk if you can't make the payments.

Before using home equity to pay off credit card debt, consider what led to the debt and whether you have a realistic plan for repaying what you borrow. A lower interest rate can save you money, but only if you can comfortably manage the new debt without putting your home at unnecessary risk.

If you’re considering tapping your home equity, refinancing may be another option worth comparing to see how today’s rates and offers could affect your monthly costs.

Use the Bankrate tool below to compare today's top refinance offers:

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