3 times a HELOC is better than a credit card

While there are signs that inflation is cooling and a recession may be off the table, many Americans still struggle with higher prices and less purchasing power. With interest rates higher than they’ve been in years and the prospect of imminent relief unclear, consumers need to do their due diligence before applying for any new forms of credit. With so many options available and rates varied it pays to understand when one may be better than another. 

Homeowners have more alternatives than other borrowers thanks to the equity they’ve accumulated in their home. By using a home equity loan or home equity line of credit (HELOC), they can pay for major expenses or emergencies just as they would with a credit card or personal loan. HELOCs, in particular, operate similarly to credit cards in that they provide the borrower with a revolving line of credit to use as they see fit. In fact, there are some scenarios in which a HELOC is better to use than a credit card.

Start by exploring your HELOC options here now to see how much you could borrow.

3 times a HELOC is better than a credit card

Here are three situations in which a borrower may be better served using a HELOC instead of a credit card.

When you want a lower interest rate

If you’re a borrower with good or excellent credit then you’ll likely be provided the lowest interest rate available. But the lower rate will generally come with a HELOC, not a credit card. Credit card interest rates are currently hovering around the 20% mark, making borrowing with this type of credit prohibitive if you don’t intend to pay off the amount used immediately. Meanwhile, interest rates on HELOCs are around 8% to 10%, depending on your credit history and the lender you use. While rates on HELOCs have also gone up in recent months, they’re still significantly lower than what you would expect to get with a credit card. That rate difference will add up quickly, particularly if you plan to borrow often over an extended period.

Check HELOC rates here now to see what you’re eligible for.

When you need it to make home repairs

Arguably the best reason to use a home equity loan or a HELOC is the tax deduction. Specifically, if you use a HELOC to make IRS-eligible home repairs or renovations you can then deduct the interest you paid on it during the tax year in question. 

“Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan,” the IRS explains online. “The loan must be secured by the taxpayer’s main home or second home (qualified residence), and meet other requirements.”

Since credit card interest can’t be deducted from your taxes – and HELOC interest can – HELOCs are generally better to use than credit cards when it comes time to fix up your home.

When you need a large amount

Anyone who has a credit card already knows about the limits most borrowers will allow. Depending on the credit card company and your personal financial background, you may only get approved to borrow a few thousand dollars. HELOCs, however, will allow you to borrow tens (if not hundreds) of thousands of dollars. In fact, most borrowers will let you take up to 85% of your home equity at the time of your application.

So if you have $200,000 of equity in your home, for example, you could potentially withdraw $170,000. Compare that to the top credit limit on one of your credit cards and it becomes clear that HELOCs are preferable when you need a large amount of money.

The bottom line

Everyone’s personal financial situation and goals are different. What makes sense for one borrower may not be as advantageous for another and vice versa. There are some specific times, however, when homeowners may be better served taking out a HELOC instead of applying for a credit card. When they want to pay a lower interest rate, for example, a HELOC may be the better choice. Similarly, when they know they want to use it for home repairs and renovations, a HELOC will be preferable to use for it’s favorable interest tax deduction at the end of the year. Finally, when borrowers need a large amount of money (think tens of thousands of dollars or more), a HELOC could be the better route instead of having to deal with the limited credit lines many credit card providers offer. 

Learn more here now.