The pros and cons of paying off credit cards with a HELOC

According to a 2017 American household credit card debt study, the average American household with credit card debt has a balance exceeding $15,000. If this sounds all too familiar, you may consider consolidating several balances into a single home equity line of credit, or HELOC. Here are the pros and cons of this approach:

Pros:

• Interest rates tend to be lower. A HELOC is based on your home equity, the difference between the value of your home and your outstanding mortgage. Because a HELOC is secured by your home (your house becomes collateral for the debt), a lender takes on less risk and may offer a variable line of credit at a substantially lower rate than you'll get with an unsecured credit card.

• It's easier to manage payments. By paying off credit card balances using a single HELOC, you may find it easier to keep track of monthly due dates. No more late payment fees because you missed one.

Cons:

• Your home is on the line. By pooling your credit card balances into a single line of credit, you're not getting rid of debt — you're trading one form of debt for another. If you fail to make payments on time, lenders can foreclose on your house.

• Setting up a HELOC can be expensive. Depending on the financial institution, fees for setting up a home equity line of credit may approach the closing costs on a home purchase.

Before signing up for a HELOC, research all your options for consolidating and/or liquidating high credit card balances. For example, you might use the "snowball method" to pay off low balance credit cards first or implement a 3-year plan to settle your debts.

Regardless of the method you choose, taking steps to modify poor spending habits is often the smartest way to climb out of credit card debt and secure a debt-free financial future.