HELOC Vs. Credit Card
A home equity line of credit and a credit card both allow a person to borrow money from a bank. A HELOC is a line of credit that the borrower's house secures, and a credit card is an unsecured loan. Because of the extra security that the house provides, a HELOC provides additional features that a credit card does not, but the borrower risks losing the house if the loan cannot be paid off.
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Home Equity
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A HELOC is linked to the borrower's home equity. If the value of the home decreases, the bank may decide to lower the borrowing limit on the HELOC, or even prevent the borrower from taking out additional loans. According to the Federal Reserve, the bank is required by law to reinstate the original HELOC limit if the conditions for freezing or reducing the credit line no longer apply, such as a decrease of the home value, or a decrease of the homeowner's equity.
Interest Rate
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Because a HELOC is secured by home equity and a credit card is not secured, a bank charges a lower interest rate on a HELOC. A borrower can transfer credit card debt to a HELOC to save money. According to the state of Texas, the average interest rate on a credit card is 13.8 percent, and the average interest rate on a HELOC is 4.4 percent.
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Taxes
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A HELOC provides additional tax deductions that a credit card loan does not. Interest that a homeowner pays on a home loan is deductible from gross income when the homeowner files federal income taxes. According to the state of Texas, the average homeowner receives an additional $104.78 deduction from federal income taxes each year by borrowing from a HELOC instead of using a credit card.
Risk
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The use of a HELOC creates additional risk for the homeowner. A credit card is an unsecured loan, and a homeowner may be able to file bankruptcy and keep the house even with large unpaid debts. When the homeowner signs up for a home equity line of credit, the bank receives the right to foreclose on the house and sell it so the bank can recover its losses.
Qualifying
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If a homeowner has significant home equity, it can be easier to get a HELOC than a credit card. The bank requires a credit card applicant to provide proof of income for several years, as well as a high credit score, to receive a credit card with a low interest rate. According to the Federal Deposit Insurance Corporation, a home equity line of credit is also easier to get and has better terms than an auto loan, since a car is less valuable as collateral than a house.
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