Is it a good idea to consolidate your credit card debt onto a home equity line of credit? I’ve been getting asked this question a lot lately. A lot of people are looking to consolidate debt, minimize expenses, and help pay down those high interest rate credit cards.
So what you have to look at is what interest rates those credit cards are at compared to what the interest rate is on the home equity line of credit. I have great credit, and most of my credit cards are at 29% interest if I keep a balance on there. I’ve seen most have been anywhere from 25 to 29% as far as the interest rates on credit cards go.
Home equity lines of credit are going to be much better on interest rate than that. So it can help you lower your payment or put more towards principal if you’re still making that same payment.
The Real Numbers: HELOC vs. Credit Card Interest
To give you a quick example, here’s what we’ll look at. Let’s take $50,000 in credit card debt. Let’s say that $50,000 in credit card debt has a 29% interest rate on it. That means your minimum interest payment is going to be $1,200 a month. So what this means is $1,200 a month is what it’s going to cost just to pay the interest on it, not a penny going towards principal.
Now, if you took all that and you put that $50,000 onto a home equity line of credit, let’s just say the home equity line of credit was at 14%. I’m not saying that’s where the rates are at right now, but let’s just use 14% as a number for this scenario.
So at 14% interest rate, with that $50,000 in credit card debt transferred out of there, you’re looking at a payment of $580 a month for the interest-only payment. So basically the payment you need to make to just pay that interest.
But if you continue to make that $1,200 payment you were making before on the interest-only payments for the credit cards, you’re now putting $620 a month extra towards that principal. So now you have about $7,400 a year going towards principal, as opposed to the other scenario where you’re just leaving those high balances on the high interest rate credit cards, making your minimum payment, and essentially just paying that interest back while your balances aren’t going down at all.
So transferring the balances over to the home equity line of credit, you can either lower the payment if you’re just looking to lower your monthly expenses because things are tough. But if you’re also looking to pay them down faster, then moving all that debt onto something that’s going to have a much lower interest rate and paying that same payment you were paying before is going to take that balance down much more.
