Home Equity Line of Credit Versus Credit Cards

While both sources of financing - home equity lines of credit and credit cards - are revolving, or open-ended, and therefore can be used for the same types of expenses, it is important to know the differences between them so you can use them as wisely as possible.

Similarities

The similarities between home equity lines of credit and credit cards include:

• They are open-ended. With both home equity lines of credit and credit cards, you have ongoing access to your funds. Therefore, you can use both of them to finance ongoing expenses.
• They have special rates. Both credit cards and home equity lines of credit can offer low introductory rates.
• They have variable interest rates. On most credit cards and HELOCs, the interest rate is variable. That means that it is tied to a specific index; in most cases prime is used. When prime drops, your interest rate drops, and when it goes up, the rate goes up.
• They have card offers. Obviously, when you have a credit card, it is the medium through which you access your credit. Similarly, with a home equity line of credit, you have the option of getting a card to access your line of credit. Typically, HELOC usage is by writing a check.

Differences

Following are some of the differences between home equity lines of credit and credit cards:

• Limitations. Most HELOCs have a specific period in which funds can be accessed, whereas credit cards do not. All HELOCs and credit cards are subject to cancellation based on payment history.

• Lower interest rates. The interest rates on home equity lines of credit are typically lower than those on credit cards after any introductory period.
• Tax benefits. The interest on a home equity line of credit is usually tax-deductible, whereas that on a credit card is usually not.

Do's

• Many consumers use their equity to help fund their children's college education. This is ordinary perceived to be a good use of it because it is a good investment in their future.
• Another very popular use of a home equity line of credit is to finance a home improvement or renovation project. The benefit of having access to your funds can be combined with the benefit of putting money into your house and increasing its value and its equity for future use.

Don't's

• You should not use your home equity line of credit for frivolous expenses. Some HELOCs have a minimum advance requirement, resulting in an inability to make everyday purchases with your line of credit. Also, most credit cards offer rewards programs, and HELOCs do not. Therefore, let your credit card cover everyday expenses and earn rewards, and use your HELOC for large purchases.
• Because of the favorable interest rates and tax savings, some people advise using a home equity line of credit to pay off high-interest credit card debt. If you find yourself not paying your credit card in full each month, then it might be wise to use your home equity line of credit to consolidate and pay off your debt. Be careful - once you pay off your credit card debt, do not run it up again. If you are going to pay off your debt, and stay debt-free, then using your home's equity is a good way to go. But do not take this route if there is a chance you will find yourself in credit card debt again.