HELOCs vs. Credit Cards: Which is Better?

Sometimes, you need to borrow money to cover a big expense, whether it’s an unexpected medical bill or something you hope will give you a good return, like home improvements.

Credit cards are a financing option that many people return to because they’re familiar, easy to understand, and there’s a good chance they already have one in their wallet. But credit cards have some significant downsides, including sky-high interest rates that can leave you financially drained for years to come.

If you’re a homeowner, you have another option that can be considerably more cost-effective: drawing from yourself Home is equal. In particular, a Home Equity Line of Credit (HELOC) Works just like a credit card, but comes with some unique benefits that can save you money in the long run.

Which one is best for you depends on many factors. But it helps to first understand that each is a better choice in which situation.

Check today’s home equity rates here and see how much you can borrow

HELOCs vs. Credit Cards: Which is Better?

Both credit cards and HELOCs Give you a line of credit up to a certain amount. You can draw from that line up to the limit as needed. Credit cards allow you to borrow money at any time. With HELOCs, you can borrow anytime during the draw period, which is usually around 10 years.

With both options, you pay interest on the amount you borrow. How much interest you will pay based on the federal funds rate; Both HELOC and credit card rates are variable, so they fluctuate based on where the federal funds rate is.

Although they have some similarities, there are some key differences when considering whether a HELOC or credit card is the best option for you.

When is a HELOC better?

A HELOC may be your wise choice in the following situations.

• When you want a lower interest rate: One of the most significant differences between HELOCs and credit cards is the interest rate. HELOCs typically have lower interest rates than credit cards, making them a more affordable option for long-term borrowing. For example, the Average HELOC rate Currently stands at around 8.5%, while the average interest rate on new cards is above 20%.
• When you need a large quantity: A HELOC can be Allow you to borrow Up to several thousand dollars depending on your cause Amount of home equity and credit score. On the other hand, credit cards usually have limits of about $1,000 to $2,500. If you need access to a significant amount, a HELOC is more likely to provide it.
• When you want to get tax benefits: If you use your HELOC funds to get IRS-approved home improvementYou may be able to Deduct interest Come tax time. This is a nice feature that can help you save a little money.

Compare your home equity options online now!

When is a credit card good?

You may want to consider a credit card in the following situations.

• When you don’t have enough home equity: lender usually required You need to have at least 15% to 20% equity in your home to borrow from it. If you haven’t lived in your home for a long time or haven’t paid off much of the mortgage balance, you may not have enough equity to qualify for a HELOC.
• When you can pay off the balance faster: Some HELOCs charge a penalty if you pay them off before the end of the draw period. Additionally, you accrue interest from the time you open the HELOC until the time you pay it off. But if you can pay off a credit card immediately — or in the very near future — high interest rates may not matter because you won’t earn as much interest. Combine that with the truth that comes with HELOCs Closing FeesAnd it can save you money.
• When there is a worthwhile promotion: If you qualify for a 0% balance transfer offer, this may give you some breathing room to pay off your balance without interest. You still have to pay it off before the promotion expires, but it can give you anywhere from a few months to a few years to do so.
• You need the money as soon as possible: A HELOC can take anywhere from two weeks to two months to close. If you have an emergency expense you need to pay right away, a HELOC is not appropriate.
• When you worry about losing your home: Your home serves as collateral for a HELOC, meaning if you can’t keep up with your payments, you risk losing your home to foreclosure. Credit cards offer the flexibility to make only the minimum payment if you’re having a tough month (although, of course, that means you’ll pay more interest).

Bottom line

In general, HELOCs are a better choice than credit cards if you have enough equity built up in your home. They have lower interest rates, allow you to borrow more and sometimes come with tax benefits.

That said, there are times when you should go for a credit card — especially, if you need the funds right away or you don’t have much equity in your home. In this instance, you take advantage of any promotions and make a concerted effort to close the balance as soon as possible. If you borrow wisely, you can get the funds you need and pay as little as possible for them.

Ready to look at your home equity options? Get started by checking current rates here.