HELOC vs Credit Card: Which Is Best for You?

Whether you’re looking to fund a home improvement project, pay off high-interest debt, or have a major expense coming up, comparing a HELOC vs credit card may be a good starting point.

While the right choice will depend on many factors, read on to better understand the advantages, disadvantages, and the scenarios when it’s best to use each.

In this article (Skip to...)

• What is a HELOC?
• HELOC vs credit card comparison
• HELOC pros and cons
• When to use a HELOC
• When to use a credit card
• Credit score impact

What is a HELOC?

A home equity line of credit (HELOC) is essentially a credit line that taps into your home’s accrued equity, converting this equity into cash. Qualifying for HELOC requires putting up your property as collateral to secure the funds.

Unlike a home equity loan, in which you receive your borrowed funds in total upfront at closing, a HELOC works more like a credit card. This is a revolving line of credit that has a preset maximum spending amount.

You can tap into the credit line, up to your preapproved credit limit whenever you need funds. When you pay down your balance (with interest), your available credit is replenished.

How do HELOCs and credit cards compare?

Like credit cards, the interest rates on HELOCs are usually variable, although many HELOC lenders permit you to lock the rate on some or all of your balance. Credit card rates usually cannot be locked.

HELOC rates are usually higher than standard fixed mortgage rates but often lower than home equity loan rates. These interest rates rise and fall based on a public index such as the prime or U.S. Treasury bill rates.

Unlike credit cards, with a HELOC you can only draw from your credit limit for a fixed period (called the “draw period”). During the draw period, which usually spans 10 years, interest-only payments must be made on any amount you’ve borrowed from the line of credit.

If desired, you can pay more than the interest-only minimum on your HELOC and repay the principal. This will replenish the available funds and reduce how much you owe in interest. After your draw period, you can no longer borrow money and must repay your outstanding balance.

A credit card, by contrast, does not require you to put up any physical collateral like your home. That means you don’t risk losing your home to foreclosure if you don’t repay your credit card debt. But you will almost certainly pay higher interest rates with a credit card than you would for a HELOC that makes you pledge collateral.

If you are leaning toward choosing the credit card route, check out these options.

Pros and cons of a HELOC over a credit card

The use of credit cards and their debt overshadows HELOC amounts.

Credit cards amassed a total debt of $1.03 trillion in the second quarter of 2023 — the first time passing the trillion dollar mark — compared to about $340 billion for HELOCs, according to the Federal Reserve Bank of New York.

The Fed’s report also showed credit card users were over 10 times more likely to enter serious delinquency on their balances than HELOC borrowers. A 5.08% share of card users missed payments by over 90 days compared to 0.44% of those with HELOCs.

Perhaps this isn’t surprising with credit cards generally having higher interest rates and a lower barrier to entry since you need a mortgage to leverage a HELOC.

The advantages of using a HELOC instead of a credit card include:

• The interest rates on a HELOC are typically much lower than rates on credit cards – often below 10% for the former versus 15% to 20% or more for the latter.
• Your borrowing limit will be higher with a HELOC – commonly, your ceiling is $35,000 or more compared to $5,000 to $10,000 for many credit cards. This makes a HELOC an attractive option to finance a large transaction or consolidate debt.
• The interest rate on a HELOC can be locked/fixed for a particular period or the life of the line of credit, depending on your terms and the lender’s rules. Credit cards almost always charge a variable interest rate.
• The interest you pay on a HELOC can be tax-deductible, provided you itemize your taxes and your total interest deduction is based on $750,000 of indebtedness or less. “For instance, if you owe $600,000 on your home and take out a HELOC for up to $150,000, the interest is deductible as long as you itemize and spend the money improving your residence,” says Kari Brummond, an accountant and tax preparer with TaxCure.com.

Drawbacks of using a HELOC over a credit card include:

• If you don’t make payments on time or default on the loan, you could risk losing your home to foreclosure.
• You must own a home and have sufficient equity to qualify for a HELOC. Many lenders require that you have a minimum of 15% to 20% equity in your property. Credit cards don’t require owning a home or having accrued equity.
• It can be harder to qualify for and get approved for a HELOC, and the process may take longer. That’s because the lender will carefully check your credit and review necessary documentation thoroughly. Obtaining a HELOC commonly takes two to six weeks from application to closing. When you apply for a credit card, you might be instantly approved and receive the card in a matter of days.
• Less flexibility. “HELOC programs typically have a fixed repayment period, and borrowers must make regular payments during this time. That means borrowers may have less flexibility to manage their cash flow. Credit cards allow borrowers to make minimum payments, pay off their balance in full, or pay any amount in between – giving them more control over their cash flow,” says Teresa Raymond, principal broker/owner of TN Smoky Mtn Realty.

“Good candidates for charging things via credit cards are those who can manage their finances responsibly and pay off their balances in full each month. This way, they can take advantage of the convenience of using a credit card without paying any interest charges,” says Zach Larsen, CEO of Pineapple Money. “Additionally, people who use their cards wisely and have good credit scores may also benefit from cashback rewards or other incentives some credit card issuers offer. These benefits can help offset the cost of making purchases with a credit card.”

Martin Orefice, CEO of Rent To Own Labs, agrees that credit cards can come in handy when used responsibly.

“Whereas you’ll usually have to contact your bank to withdraw money from a HELOC and make it available for spending, all you have to do the credit card is take it out and use it,” he says.

When to use a HELOC vs credit card

A HELOC is often the better option in many scenarios. Here are two examples:

Scenario #1. Home improvement project

Let’s assume you are planning a home renovation that will set you back $25,000. If you use a credit card with an interest rate of 15% and make minimum payments of $250 monthly, it will take you roughly 14 years and eight months to pay off the balance, and you will end up paying $36,300 in interest.

“On the other hand, if you use a HELOC with an interest rate of 5% and make monthly payments of $250, it will take you just over nine years to pay off the balance, and you will end up paying $5,000 in total interest,” Larsen explains.

Scenario #2. Emergency expenses

Imagine you have an unexpected medical expense of $5,000 that you need to pay quickly. You have a credit card with an empty balance and an interest rate of 20%. If you use plastic to pay off your medical bill, you’ll end up paying $1,200 in interest charges if you make minimum payments of $250 per month for 24 months.

“But if you use a HELOC with an interest rate of 5% and a credit limit of $50,000, you can withdraw $5,000 and pay it off immediately,” continues Larsen. “If you make monthly payments of $250 on your HELOC, it will take you just over two years to pay off the balance, which will cost you a total of $250 in interest charges.”

When to use a credit card vs HELOC

Credit cards can be a better option in some situations. Here are two examples:

Scenario #1. Small, short-term expenses

Let’s say you need to make everyday purchases like groceries, gas, and other necessities that cost $500 per month. If you utilize a credit card with a 15% interest rate and pay it off in full each month, you’ll avoid paying any interest charges.

“On the other hand, if you use a HELOC with a 5% interest rate and make monthly payments of $500, it will take you just over three years to pay off the balance, and you will end up paying $850 in interest charges,” Larsen says.

Scenario #2: Large, one-time expenses with promotional offers

Assume you want to purchase a new vehicle that will cost $25,000. If you use a credit card with a 15% interest rate and make minimum payments of $500 per month, paying off the balance will take you over seven years, and you will consequently fork over $13,500 in interest charges.

“But if you find a credit card with a promotional offer of 0% interest for the first 12 months, you can make payments of $2,083 per month and pay off the balance within a year, all while avoiding any interest charges,” adds Larsen. “Or, if you instead use a HELOC with a 5% interest rate and make monthly payments of $500, you’ll end up paying $2,500 in interest charges over the five years it will take to pay off the balance.”

If you choose the credit card route, here are some great promotional offers to consider.

HELOC vs credit card: How does using each impact your credit score?

Both HELOCs or credit cards will impact your credit score. You’ll get a hard credit inquiry when you apply for either. This can temporarily ding your score down a few points. Also, borrowing money with a HELOC or credit card may initially lower your credit score by raising your debt-to-income ratio.

“You can also build your credit score higher by making regular payments on time for either type of debt,” Orefice says. But if you miss payments or use too much of your available credit limit, it can lower your credit score.

Next steps

Think carefully about what you need a line of credit for and how and when you intend to use it. This can help you make a more informed decision about whether to apply for and use a credit card, HELOC, or both.

Once you are approved, proceed with caution. Avoid getting in over your head by drawing more from your credit line than you can afford to pay back. And plan to repay your debt responsibly as you agreed to in your terms.