Lowering your interest rate: HELOC vs. 0% credit card

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also wrote for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Stewart Radio and other programs.

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Dear To Her Credit,
I need some sound advice on how to proceed with our current debt situation. We have one credit card -- a Visa, with a $30,000 limit. It has a high interest rate at 19 percent, and we have racked up $29,000 on it.

We have a beautiful home with a ton of equity. We are trying to decide between two options:

  • Open two new credit cards with 0-percent introductory rates and pay off the debt in 18 months. Each card has a transfer fee of $400.
  • Get a home equity line of credit at 5 percent.

It's our goal to use a "cash system" once our plan is in place. Many thanks for your time. -- Khrysten


Dear Khrysten,
I'm so glad to hear you're planning to pay off your debt and then stay free of consumer debt. Credit cards have their purposes, but as you've discovered they make lousy long-term loans. At 19 percent, your $29,000 credit card debt is costing you more than $5,000 per year just in interest. It's sabotaging all your efforts to get ahead.

Before you decide how to get out of debt, it's important to know how you got in it. If your family spends more every month than you have money coming in, your first step is to get a handle on spending. Create a realistic budget and make sure all the adults in your household agree to it. If the budget doesn't have room for debt reduction, find a way to increase your household income or cut expenses.

Your question is whether you should transfer your debt to two new credit cards with 0-percent introductory rates, or to get a home equity line of credit at 5 percent. You then plan to pay off the debt as quickly as possible.

Either plan will lower your interest expense, giving you a chance to make faster progress paying off the principal.

The problem with using debt to get out of debt, however, is that things don't always go according to plan. Take the home equity loan, for example. If you take out a home equity line of credit to pay off your $29,000 credit card debt, and then you pay the line of credit down to zero as quickly as possible, that's great.

Unfortunately, many people take out the home equity line of credit with just such good intentions. The bank may offer to give them a higher limit than they need just to pay off the credit card debt. That's OK, they think. They won't use the extra amount.

If they're not careful, or if they have a string of bad luck, however, they may use the entire home equity line of credit and run the credit cards back up to the limit again. Next thing they know, they have twice as much debt.

The same thing can happen when people get a 0-percent introductory rate credit card. They pay off the old, high-interest rate card, but they forget to close it. They get a little short of money, so they use the old card again. Now they have old cards and new cards, and the balances are going up, not down. It can happen.

If you make a budget, one that you can live on and that has enough room to cover a few unexpected expenses, you won't fall into this trap.

To make sure you escape the debt trap, take these additional steps:

  • Close the old credit card account as soon as you pay it off with the new credit cards or the home equity line of credit.
  • Try not to get a higher line of credit than you need. It's true, a higher credit limit would help your debt-to-available-credit ratio. However, you already have a house, so you won't be applying for a mortgage soon. It's more important that you avoid the temptation to use credit than it is to get a few extra points on your credit score right now. Try to improve your debt-to-available credit ratio by paying down existing debt, not by exposing yourself to more.

Between the two payoff options, I prefer the 0-percent credit cards -- but only if you are absolutely sure you can pay the balance before the introductory rate ends. The $800 total fee between the two cards is far less than the interest you'll pay on the home equity line of credit in that time. Be careful, though. If you have trouble paying off the balance, you may be stuck with high interest rates on your balance again -- and you'll be right back where you started.

You've made a commitment to paying off your debt in a short period of time, and I believe you can do it. Best of luck as you work toward your goals!

See related: 2014 balance transfer survey: Beware combo deals, two-tier fees

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Updated: 01-19-2019