The average credit card debt of U.S. families is over $6,000. With high-interest debt like this, it can be difficult to achieve your financial goals such as saving for retirement. After all, the mounting interest payments can be crippling to any budget.
If you have debt, you are probably thinking about how you can pay it off as quickly as possible. That is the right attitude, and that means you are getting on the right track. However, in almost every case, using home equity to pay debt is not a good idea.
Let’s take a closer look at HELOCs, the implications of using them, and explore other ways to pay down your debt.
What is a home equity line of credit?
Defined simply, a home equity line of credit is a loan tied to the equity in your home.
To determine how much your home has in equity, subtract the amount you’ve paid off on your mortgage from the value of the home. Depending on how long you’ve been making mortgage payments, you may have a considerable amount of equity built into your home.
When you set up a home equity line of credit, you are using the value of your home equity as collateral against your loan. In most cases, your home equity line of credit will be limited to 85% of your total home equity. Plus, you may be offered a lower loan amount based on your credit history and other factors.
Is it smart to use home equity to pay off debt?
If you are wondering, ‘Should I get a home equity loan to pay off credit card debt?’ then you are likely under the intense pressure of mounting credit card debt. A HELOC may seem like a golden solution to solve your short-term financial problems. However, in reality, it could lead to an even more stressful financial position.
Although a home equity line of credit may be enough to cover your debts, that does not mean you should pursue a HELOC. In fact, using home equity to pay debt is often a slippery slope. When you take out a HELOC, you are essentially putting your house on the line. With your house offered as collateral, you may end up losing your home if you are unable to keep up with the HELOC payments. This is a stark contrast to your credit card debt, you would not lose your home directly through credit card debts.
Many people look at home equity to consolidate debt because the interest rates are often lower than your credit card debt. However, even if you could potentially save on interest, it could cost you more financial harm in the long term. No one wants to lose their home and there are other ways to pay off debt that don’t jeopardize the stability of your living situation.
In general, the benefits of a HELOC are outweighed by the overwhelming risk of losing your home. Of course, you’ll need to decide for yourself if a home equity loan is the right fit for your situation.
Does a HELOC affect your credit score?
In terms of your credit score, a HELOC may have a big impact in the short term. Like all loans, you might take a hit to your credit score when you take out a HELOC. But with on-time payments, you can improve your credit score over time.
How to pay off debt without a home equity line of credit
If you want to pay off your credit card debt, then you have other options. You do not need to move forward with a home equity line of credit if you are not comfortable. In fact, you should carefully consider your options before applying for a HELOC. Chances are that you can find a less risky way to pay down your debt that suits your lifestyle.
Consider the options below to tackle your debt without putting your home on the line to cover your credit card debt.
Create a budget
If you are serious about getting out of debt, then you need to create a budget. With a budget, you’ll be able to plan out where you want your money to go. For example, if you want to focus your efforts on paying down debt, then a budget can help you direct your money appropriately.
As you work to create a budget, think about the difference between wants and needs. Make sure that your budget includes everything that you need, but consider cutting out unnecessary expenses. Once you’ve eliminated your debt, then you might increase your spending but for now, it is a good idea to keep your spending to a minimum. Otherwise, you could be forced to remain buried in credit card debt for longer than necessary.
Before you dismiss the idea of creating a budget, learn more about different budgeting methods to find one that works for you. If you are struggling to find a budget that suits your lifestyle, then check out our budgeting course. It will walk you through the ins and outs of creating a budget that will actually work for you.
Try debt consolidation
If you have multiple credit cards with various payments due each month, it can be difficult to make on-time payments. In this situation, it can be especially difficult to pay down your debt in the most efficient way possible. After all, simply juggling the payments is enough to make anyone’s head spin.
When there are too many debts to keep track of, debt consolidation can be a great option. The process is exactly what it sounds like, you take out a single loan to cover all of your credit card debts. After you pay off your debts with this single loan, you will only need to make one payment. With this new loan, you would make monthly payments for a specified period and then be completely free of your debt.
In general, debt consolidation only makes sense if you can find a loan with a lower interest rate than your credit card debts. However, with high interest rates stacking up with most credit card lenders, finding a lower interest rate with a debt consolidation loan shouldn’t be too difficult.
Look for balance transfer options
If you are facing high-interest credit card debt, then you want to avoid any more interest charges. A short-term solution to this problem is to seek out a balance transfer offer.
With a balance transfer offer, you would open a new credit card that offers 0% APR and transfer your credit card debt to that card. At that point, you would no longer be facing high-interest charges and you could aggressively pay down your debt. However, these balance transfer offers generally only last between 6 to 18 months. The exact amount of time will vary based on the credit card you choose, but once time runs out, your debt will start to accumulate interest again.
With a balance transfer, you need to be aware of any transfer fees. In many cases, the new credit card company will charge a fee between 2 to 5% of your total balance transferred. Depending on your debt, that could be a very significant amount of money. It is important to read the fine print of a balance transfer offer. Make sure that the transfer will save you money instead of costing you extra money.
If you decide to go down this path, then make an effort to pay down your debt during the introductory interest-free period. You’ll be able to make the most progress on your debt repayment journey if you tackle high-interest debts during a grace period offered by a balance transfer credit card.
Build a plan
Unfortunately, getting out of debt can be hard work. There is no easy way to make your debt burden go away without a commitment to a solid financial plan. When you are ready to take your debt repayment journey seriously, it is time to build a plan that will work for you.
Here are two of the methods that could work for you:
Many experts advocate for the debt snowball method. In this scenario, you would tackle your smallest debts first. As you eliminate your debts, you can add the payments you eliminate from one debt to tackle your next largest debt. You would continue on until you’ve tackled all of your debts. If you are motivated by marked progress, then the snowball method would be a good option.
The avalanche method is based on tackling your highest interest rate debts first instead of your smallest debts. In this case, you would focus your efforts on a single high-interest debt until you eliminate it. Once you’ve erased your highest-interest debt, then you would work down the line towards your lowest interest debt. With this method, you are efficiently avoiding any extra interest payments. If you are motivated by the numbers of efficiently paying down your debt, then this may be the best option.
The most important factor in choosing a debt repayment strategy is that it will motivate you to succeed. Take a minute to consider your different strategies and move forward from there. Once you’ve chosen a path, make sure to stick to it.
Pick up a side hustle
If you were living beyond your means for any amount of time, then it can be difficult to overcome your debts. No matter what your income is, it can be a challenge to eliminate all of your debt. However, if you are able to increase your income then you can dramatically accelerate your debt repayment process. That’s where a side hustle can come in to transform your life.
Although a side hustle is not a magic solution to all of your debt problems, it can help you to move forward more quickly. With hard work and determination, anyone can build a side hustle that could propel them to a debt-free life.
Luckily, there is an unlimited number of side hustles available for everyone today. Whether you want to pick up freelance work or try selling a craft, side hustling to reach your financial goals is completely possible. In fact, our very own founder, Bola, built an amazingly successful side business that brought in $70,000 in a single year. Of course, she put in many hours to make that happen, but you can find your own talents and hustle to the top.
Once you have more money coming in through your side hustle, funnel the newfound income to reach your financial goals. Don’t stop once you become debt-free. You can redirect the income to build your emergency fund or create a more balanced lifestyle for yourself.
If you want guidance on building your own side hustle success story, then check out our course. It can help you find a side hustle that lights you up and helps you achieve your financial goals.
If you want to tackle our debt, you should not need to resort to a HELOC. In fact, using home equity to pay off credit card debt should be an absolute last resort. You don’t want to put your home on the line and risk losing it to a couple of missed payments.
Instead, seek out other ways to get your credit card debt under control. If you are struggling to build a debt repayment plan that works for you, then check out our debt repayment strategy course. It can help you find the best solution to your credit card debt woes.