Is it better to get a HELOC or use credit cards?
At face value, HELOC vs. credit card isn’t a fair fight. Home equity lines of credit (HELOCs) are one of the cheapest forms of borrowing while credit cards are one of the most expensive.
However, every type of credit has its own pros and cons. And there are some circumstances when charging credit cards is a smarter choice than tapping home equity. So read on to discover which may be a better match for your needs.
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HELOC vs. credit card comparison
HELOCs and credit cards are very different loan types by nature. A HELOC is a “secured loan” that borrows from your available home equity, whereas a credit card is an “unsecured” line of credit (meaning there’s no collateral to back it up).
That’s why credit card interest rates are substantially higher than HELOC rates; think 15-20% versus 5-8%.
Still, despite their major differences, home equity lines and credit cards do function in a similar way.
Both HELOCs and cards are lines of credit. That means you’re given a credit limit and can borrow, repay, and re-borrow as often as you like up to the limit. And you pay interest only on your current balance.
Both products also come with variable rates, meaning their interest costs can rise or fall in line with market trends. However, many HELOC lenders allow you to lock the rate on some or all of your balance whereas credit card rates typically cannot be fixed.
HELOCCredit CardLoan TypeSecuredUnsecuredStructureLine of credit Line of credit Interest ratesOften below 10%Often 15%-20% or higherLoan AmountsOften $35,000 and upOften $5,000-$10,000Fixed-Rate Options✔No End Date✔No Setup Costs✔*✔
*HELOC fees vary by lender. Many offer no-closing-cost options. Ask about setup fees before you apply.
When is a HELOC better?
A home equity line of credit is typically better than a credit card when you need to borrow a large sum of money and pay it off over an extended period. Choose a HELOC when you:
Need a high credit limit. Some HELOC lenders offer a minimum HELOC of $10,000 while others say $35,000. The maximum could be $1 million or moreWant lower interest rates Are a creditworthy homeownerHave enough home equity to qualify for a HELOCWant the option to lock the rate on some or all of your balance (only some lenders allow this)Want to protect your credit score from the negative effects of overusing credit cards
If you can get one, a HELOC will almost always beat a credit card. You can learn more about what’s required to qualify for a HELOC here.
When are credit cards better?
You might choose credit cards over a HELOC when you:
Don’t need to borrow large sums. A credit card is better for small, day-to-day chargesCan’t get a HELOC or other less expensive type of loan or line of creditHave a temporary emergency and need rapid funding
It’s typically best to avoid credit cards for major expenses like home renovations or starting a business. But for regular, day-to-day spending, credit cards make sense and can even offer perks (like travel rewards).
Ideally, you should charge only what you can pay off in full on a monthly basis.
What’s the difference between a HELOC and a credit card?
Although HELOCs and credit cards work in a similar way, there are some significant differences between the two. Here’s what to consider as you weigh the pros and cons:
Secured vs. unsecured borrowing
Credit cards are “unsecured” borrowing. That means you’re not putting up an asset as security (“collateral”) for the loan. If you can’t repay what you borrow, there’s no direct way for your lender to seize one of your assets.
HELOCs, however, are a type of second mortgage. That means they’re secured by your home. So, if you fall far enough behind with your payments, you could face foreclosure.
It also means HELOCs are available only to homeowners. No home means no equity and therefore no HELOC. So, if you’re among the roughly 36% of households who rent their homes, you’ll have to turn to cards, personal loans or some other form of borrowing. There’s a list of options below.
One of the biggest differences between a HELOC and a credit card is the amount of money you can borrow. Since HELOCs are secured and safer for lenders, they can offer far more money than credit card companies ever would.
Maximum HELOC amounts are based on your available home equity and your credit score. But it’s not uncommon to see loan amounts in the tens of thousands. And some people are approved to borrow in the hundreds of thousands. That’s why homeowners often tap equity when they need to fund a big expense like home improvements.
Credit cards on the other hand, often come with limits starting around $5,000-$10,000. And even with higher limits, it’s unwise to max out your credit cards because of the high interest rates and negative impact on your credit score.
Costs of borrowing
Because HELOCs are secured loans, lenders can charge much lower interest rates for them. A HELOC is much less risky than plastic because a lender can recoup its losses from a bad loan through foreclosure.
Setup costs for credit cards and HELOCs can be similar. Some lenders do charge relatively modest closing costs for HELOCs. But it’s not hard to find one with zero fees. And those that do levy charges typically allow you to roll them up in your line of credit.
Card issuers pretty much never have set-up costs, although some do charge an annual fee.
Using your credit over time
A credit card can be for life. It just keeps renewing unless you choose to close the account, or unless the issuer goes out of business or decides you’ve become too big a risk and cancels your card for you.
HELOCs, however, have an expiration date.
You can typically only borrow from your HELOC over a period of 5-15 years (this is known as the “draw period”). After that, you can no longer tap the credit line and have to repay any outstanding balance. HELOC repayment periods typically last for up to 20 years, during which time you’re required to make regular monthly payments in full.
Impact on your credit score
With a credit card, your FICO score is affected by something called your “credit utilization ratio.” That’s your balance as a percentage of the card’s credit limit. Every time your credit card balance exceeds 30% of its limit, your score likely takes a hit. And a card that’s maxed out over a sustained period could do real damage.
Clearly, that means credit cards are a much less effective tool for borrowing significant sums over a sustained period. You’d likely need a towering pile of plastic to access the amount offered by a fairly modest HELOC.
But HELOCs are different. Credit utilization rules don’t apply to them. So you can max out your HELOC for as long as you like without it touching your credit score.
Benefits of a HELOC
The biggest benefit of a HELOC over a credit card is that you’ll see far lower interest rates.
In December 2022, for example, the average credit card rate in America was around 19%-23% APR (depending on the source). At the same time, the average HELOC rate was just under 8%, with a typical range between 6% and 11%.
At the time this was written, interest rates had been rising and were expected to continue to do so for months to come. However, things may be very different by the time you read this. So check yourself to see where they are now.
Of course, HELOCs and credit cards are similarly affected by rate increases and drops. So the difference between the two should stay roughly the same, proportionately.
Rate lock options
Although both products almost always come with variable rates, some HELOC lenders allow you to lock the rate when you make a withdrawal. If this is important to you, be sure to choose one of these.
But also check whether there’s a cap on the number of withdrawals that can be fixed, any fees that might apply, and how much higher the locked rate might be than the floating one was. You can ask lenders these questions when you apply.
If variable rates make you really nervous, consider choosing a home equity loan (HELOAN) rather than a HELOC. With HELOANs, you get a lump sum and a fixed rate and repay your loan in equal installments. Read HELOC vs. home equity loan: Compare pros and cons.
Easy on your credit score
Credit utilization ratios don’t apply to HELOCs. But they do to credit cards. And it’s easy to damage your score if you charge too much to your plastic.
Benefits of using credit cards
Credit cards are open to pretty much everyone. Of course, some cards are available only to those with great credit. But most people can get approved (with varying rates and borrowing limits, depending on their FICO scores).
HELOCs are available only to homeowners. And then only to those who have sufficient equity to cover the credit limit. Most lenders let you borrow no more than 85% or 90% of your home’s appraised value between your first and second mortgage.
Whether you choose cards or a HELOC, your credit score will make a huge difference to the interest rates you’re charged. Too low of a score could see you declined for either. So, try to boost your score before applying for any credit.
No setup costs
It’s not hard to find a HELOC lender that doesn’t charge for setting up your loan. And those that do pretty much always let you add any costs to your line of credit. But credit card issuers pretty much never charge a dime — unless you incur penalties or opt for one with an annual fee.
Other borrowing options
Almost anything — short of loan sharks and payday loans — is better than having high credit card balances over a sustained period. The good news is, there are a number of different options worth exploring before turning to credit cards for a large expense.
Home equity loan: Like HELOCs, these are only for creditworthy homeowners. But they’re good for those who want a straightforward, predictable loan with a fixed rate and equal installments from start to finishPersonal loan: Open to everyone, including renters and homeowners. There are even versions for those with bad credit. However, as always, the lower your score the higher your interest rates are likely to be. And rates on bad credit personal loans may be comparable to — or higher than — credit card rates. Still, there’s less risk to your credit utilization ratioLoans from family and friends: These can be the best way to borrow, if you have a relation who’s willing and able to lend to you. But they do come with the added risk of straining your relationship if anything goes wrongEmployer loans: Some employers are willing to lend to their employees. Ask yours401(k) loans: The very last resort. Don’t tap your retirement savings unless you’re out of options
Try to stick to borrowing from mainstream lenders, if you can. And regardless of which loan type you choose, be sure to compare offers from a few different lenders. You might be surprised how much interest rates and lending terms can vary from one company to the next.
Your next steps
If you’re looking to borrow a large sum of money, a HELOC or home equity loan is almost always better than charging your credit cards. You’re likely to save a lot of money and protect your credit score in the long run.
Get in touch with a few different lenders when you’re ready to start. Compare their interest rates, fees, and terms to be sure you’re getting the best overall deal on your new loan.