A home equity line of credit (HELOC) and a credit card can both come in handy if you need to pay for home renovations, consolidate debt, or make another big purchase. Each offers a revolving line of credit that you can draw on as needed and pay off over time. But they also have major differences, especially when it comes to interest rates, repayment terms, credit limits, and collateral requirements. Understanding what a HELOC is and how it differs from a credit card can help you determine whether a HELOC or credit card would better fit your needs in a certain situation.
Table of Contents
- Key Points
- • HELOCs are secured by your home, making them riskier than unsecured credit cards as missed payments could result in foreclosure.
- • HELOCs generally offer lower interest rates compared to credit cards, though cards may offer 0% promotional-period rates.
- • HELOC limits tend to be much higher than credit card limits, often reaching hundreds of thousands of dollars.
- • HELOCs have structured repayment terms up to 30 years; credit cards have no set term and only require minimum payments.
- • A HELOC is better for large, long-term expenses (like renovations), while a credit card may better suit smaller, short-term expenses.
What Is a HELOC?
A HELOC is a revolving line of credit that’s secured by your home. It’s not the same thing as a home equity loan, which provides a lump sum upfront.
Because you’re tapping into your equity, your home acts as collateral for the HELOC. If you can’t pay back what you borrowed, your home could go into foreclosure.
How a HELOC Works
As a revolving line of credit, a HELOC lets you borrow funds on an as-needed basis up to a maximum approved amount for a “draw” period of up to a decade. If you repay the funds during your draw period, they’ll become available again to borrow.
Depending on the lender, your maximum may be 80% to 90% of your available equity. To calculate home equity, subtract your home loan balance from your house’s appraised value.
As for how HELOC interest is calculated, rates are often variable, which can make your monthly payment amount somewhat unpredictable. There are some HELOCs that let you lock in a fixed rate for a period of time.
It can be easy to confuse a HELOC with a home equity loan. Make sure you understand a home equity loan vs. HELOC. Both of these borrowing methods, along with a cash-out refinance, are ways you can borrow money based on your home equity. But a home equity loan is a lump-sum loan and repayment begins immediately; with a HELOC, you can borrow in increments.
HELOC Draw Period vs. Repayment Period
As we’ve seen, HELOCs are divided into two phases: a draw period followed by a repayment period. During the draw period, you can withdraw money to pay for expenses, such as home renovations or debt consolidation. You’re generally only required to pay interest charges during the draw period, though you can choose to pay more. There isn’t a HELOC credit card, per se, but some HELOC lenders provide borrowers with a card that is similar to a credit card that they can use to access their credit line.
Once the draw phase ends, you can no longer withdraw from your HELOC and enter full repayment. During this repayment period, you’ll make both principal and interest payments. The repayment phase may span up to 20 years.
What Is a Credit Card?
Similar to a HELOC, a credit card offers a revolving line of credit that you can draw from to make purchases or withdraw money as a cash advance. Credit cards are typically unsecured, meaning they don’t use your home or any other asset as collateral.
Instead, your approval for a credit card is based on your creditworthiness. There are some secured credit cards, which are designed for people who have thin or damaged credit. These cards require a deposit upfront, which acts as your credit limit.
If you can qualify for an unsecured card, though, you’ll generally get a higher credit limit and may qualify for perks like cash back or travel rewards.
How Credit Cards Work
When you swipe your credit card at checkout or use it to make a purchase online, you’re borrowing money from your credit card issuer. If you pay off your balance in full each month, you can avoid interest charges.
If not, you’ll be charged interest, which often accrues at a high variable rate. You’re required to make minimum payments on your balance each month by a certain due date. Missing these minimum payments can lead to late fees and damage your credit.
With unsecured credit cards, your credit limit depends on your financial profile, including your credit score and debt-to-income ratio. You can access your credit line as long as the card is open.
Types of Credit Cards to Consider
There are various types of credit cards you can consider, including:
• Rewards credit cards: These cards offer rewards back on your spending, such as cash back or travel miles.
• Balance transfer cards: If you’re looking to consolidate debt, these cards usually offer 0% APR (annual percentage rate) on balance transfers for a period of time. You’ll still have to pay balance transfer fees.
• 0% APR cards: Some cards offer a promotional period of 0% APR on purchases that may span a year or longer. Interest will accrue when that period comes to an end.
• Secured credit cards: Designed for borrowers with weak credit, secured cards require an upfront deposit, which acts as your credit limit. They can help you improve your credit score so you can eventually graduate to an unsecured credit card.
HELOC vs. Credit Card: Key Differences
While both HELOCs and credit cards offer revolving credit, they have major differences in how they work.
Interest Rates
Since HELOCs are secured by your home, they tend to offer lower interest rates than credit cards. Average HELOC rates currently fall around 7% to 8%, while the average rate on a credit card is 21%.
Some credit cards offer 0% APR for a limited time to new cardholders, but your rate will shoot up when the promotional period ends. You can avoid interest charges if you pay your balance in full each month.
Credit Limits and Borrowing Power
HELOC credit limits are often much higher than credit card limits. Depending on the lender and how much equity you hold, you might be able to borrow hundreds of thousands of dollars.
Credit cards limits tend to be lower. The average total limit across all cards is $33,980, according to Experian data.
Repayment Terms
Many HELOCs span up to 30 years, with a 10-year draw period and a 20-year repayment period. This long repayment term can make monthly payments more affordable, but stretching out repayment can also rack up interest charges.
This is another credit card vs. HELOC difference. Credit cards have no set term. Instead, you’re required to make minimum payments on your balance each month. You can avoid interest charges altogether if you pay off your balance in full each month. Unlike a HELOC, a credit card typically renews automatically as long as you don’t cancel the account or fail to make payments, and you continue paying any associated fees.
Risk and Collateral
HELOCs carry greater risk than credit cards, since they use your home as collateral. If you can’t afford repayment, you could lose your home to foreclosure.
Most credit cards are unsecured, so you don’t have to back them with collateral. Missing payments could still cause damage to your credit, but you won’t lose your house.
Impact on Credit Score
Whether you have a HELOC or credit card, missing payments will negatively impact your credit score. Making on-time payments, however, can improve it.
Your credit card use more directly impacts your credit utilization, which affects 30% of your score. It’s generally wise to keep your credit utilization below 30%.
Recommended: HELOC vs. Cash-Out Refinance
When a HELOC Makes More Sense
A HELOC may be a better choice than a credit card if you:
• Need to pay for large expenses, like home renovations or major repairs
• Can qualify for lower interest rates compared to a credit card
• Hold sufficient equity in your home to qualify for a HELOC
• Have a stable income source and are confident you can repay the HELOC
• Are looking for lengthy repayment terms that may span up to 20 years
HELOCs are especially popular for home improvement projects with ongoing costs, since you can borrow funds as needed. Plus, they may come with a tax advantage — you can deduct the interest you pay on a HELOC if you use it to “build, build, or substantially improve” your residence. You’ll need to itemize on your federal tax return in order to claim this deduction, so talking to a tax advisor can be helpful. It can take a little more time to qualify for a HELOC than it does for a credit card because lenders typically require an appraisal of your home’s value as part of the qualification process.
When a Credit Card Makes More Sense
In the credit card vs. HELOC equation, a credit card may make more sense if you:
• Need to cover small, short-term expenses
• Can take advantage of a 0% introductory APR or balance transfer APR
• Want to earn rewards on your spending, such as cash back or airline miles
• Prefer not to use your home as collateral
• Are looking for fast and easy access to funds
Credit cards are a better fit for everyday spending or short-term financing, especially if you can take advantage of a 0% APR offer or pay off your balance in full each month.
Can You Use Both Together?
You don’t necessarily have to choose between a HELOC and a credit card — you can use both as meets your needs. For example, you might use a HELOC to cover a major home renovation, but you could charge your credit card for smaller purchases related to the project or everyday spending.
Just be aware of interest charges and fees, and make sure not to over-extend yourself across multiple lines of credit.
Pros and Cons of a HELOC
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Pros:
• More competitive interest rates
• Higher credit limits
• Flexible, revolving access to funds during the draw period
• Interest may be tax deductible if you borrow for qualifying home improvements
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Cons:
• Your home acts as collateral
• Interest rates are often variable and can increase over time
• Payments can increase significantly between draw period and repayment period
• Application process can be lengthy and extensive
• You may have to pay closing costs and other fees
Pros and Cons of a Credit Card
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Pros:
• No collateral required on unsecured credit cards
• Instant approval and widespread acceptance
• Potential to earn rewards, like cash back and travel points
• 0% APR promotional offers are available
• No interest charges if you pay your balance in full each month
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Cons:
• High interest rates if you carry a balance
• Likely lower credit limits than a HELOC
• Charges can increase your credit utilization, which can hurt your credit score
• Only making minimum payments can stretch repayment out over years
• Some merchants have a surcharge for credit card transactions
How to Choose Between a HELOC and a Credit Card
When choosing between a HELOC and a credit card, asking yourself these questions can help:
• How much do you need to borrow? If you’re covering a large project, a HELOC may be the better fit. If you need a smaller amount, a credit card may be preferable.
• How quickly can you pay back the debt? A credit card may be better for short-term borrowing, especially if you can qualify for a 0% APR offer. HELOCs often offer repayment terms up to 20 years.
• Are you comfortable using your home as collateral? Consider the risk of taking out a secured HELOC vs. an unsecured credit card.
• What are the total costs of borrowing? Compare interest rates, fees, and repayment terms to determine which financing option would cost less.
Whichever you choose, make sure you have a clear repayment strategy and understand your costs of borrowing so you don’t get into unmanageable debt.
The Takeaway
Both HELOCs and credit cards can be useful financial tools when used wisely, but they usually serve different purposes. A HELOC tends to be better suited for homeowners who need to cover large expenses and prefer a lengthy repayment term. A credit card is usually a more convenient option for everyday purchases and short-term financing. By considering your borrowing needs and repayment ability, you can determine whether a HELOC, credit card, or both would best provide the financing you seek.
SoFi now offers flexible HELOC options to turn your home equity into cash. Access up to 85% of your home equity, or $350,000, to finance home improvements or consolidate debt. Competitive interest rates and repayment terms up to 20 years could result in lower monthly payments versus other loans. And the online application process is quick and convenient.
Unlock your home’s value with a home equity line of credit from SoFi.
FAQ
What is the difference between a HELOC and a credit card?
A HELOC is secured by your home and involves a draw period and a repayment period. It typically has lower interest rates and a longer approval process than a credit card. A credit card is often unsecured and you can get approved instantly, but it will likely come with higher interest rates. You can keep borrowing and paying off your balance for as long as your account is open. HELOC borrowers can sometimes get a card to use to pay bills from their credit line. This HELOC credit card is usually called a HELOC card or an equity card.
Is a HELOC better than a credit card for large expenses?
A HELOC may be better than a credit card for large expenses, since it could offer higher credit limits and lower interest rates. It can be riskier than a credit card, though, since your home acts as collateral.
Can I use a HELOC like a credit card?
Similar to a credit card, a HELOC is a revolving line of credit that you can draw from as needed. Some lenders even provide borrowers with a sort of HELOC credit card they can use to access their account. However, when the draw period on the HELOC ends, you can no longer take out funds. Over-using your HELOC is risky since it’s secured by your home.
What are the risks of using a HELOC instead of a credit card?
The main risk of using a HELOC instead of a credit card is losing your home to foreclosure if you can’t pay it back. You also may face rising, unpredictable costs if your HELOC has a variable interest rate.
Does a HELOC affect your credit score the same way a credit card does?
Your payments on a HELOC can affect your credit score the same way a credit card does — on-time payments can improve it, while late payments can drag it down. Unlike a credit card, however, your HELOC balance may not impact your FICO® score.
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