Credit cards make it simple to purchase big-ticket items like televisions, computers, and furniture. As long as cardholders have the available balance to cover the cost of the item, it’s possible to leave the store with a purchase that exceeds their checking account balance. But, what if money is needed to pay for an extensive home improvement project, cover an emergency medical bill, or pay for a year of college tuition? For many, those costs exceed current credit card limits.
A home equity line of credit, aka HELOC, might be the answer. It works similar to a credit card. Approved applicants access funds as needed, up to a preset credit limit. Paying down the balance allows borrowers to use additional funds at their discretion. However, there are distinct differences borrowers should be aware of before using either method to pay for their next big purchase.
Home Equity Lines of Credit (HELOCs) versus Credit Cards Comparison Table*
Similarities | Differences |
| Borrowers repay in monthly installments only if there is a balance on the account. | A primary or second home serves as collateral for the HELOC. Credit cards do not require collateral. |
| Borrowers are assigned a variable interest rate, which means payments can fluctuate based on the balance. | Minimum HELOC loan amounts often exceed the maximum credit limits available with credit cards. For example, the credit lines for Community Credit Union’s (CCU) HELOCs can be as high as 80 percent of the home’s equity. Generally, lenders figure home equity by subtracting the current market value of the property from the principal balance of any outstanding loans against the property. |
| Credit scores influence the interest rate assigned to each borrower. | Credit cards may charge annual fees, over-the-limit fees, and late payment fees. Most HELOCs do not charge such fees. |
| Interest charges accrue based on the amount borrowed or outstanding balance, not the credit limit. | HELOC borrowers pay closing costs to process the loan. Credit cards do not have closing fees. |
| Both increase the buying power of the borrower. | The average interest rate for a credit card is 17.61 percent. Community Credit Union offers HELOCs with interest rates in the single digits. |
| Creditors report repayment activity to at least one of the major credit reporting bureaus. | HELOC interest payments may be tax deductible under certain circumstances. ** |
| Banks and credit unions offer both types of credit. | Access to HELOC funds is limited to a predetermined draw period during which borrowers can access the approved credit limit. Credit cards do not have draw periods. |
| Both have specific repayment terms and conditions. | Credit cards, like CCU’s Visa® Pivot, can help build or repair credit. HELOCs require good credit at the time of application. |
HELOCs and credit cards offer benefits to creditworthy applicants. Each one can strengthen credit scores, support financial goals, and allow borrowers to live the lifestyle that aligns with their overall financial plans.
Visit CCU’s Credit Cards page to apply for a low-interest rate credit card. Eligible members with a more substantial financial need can call CCU’s Mortgage Center at 781.598.0820 to check current rates and learn how a HELOC can help in achieving goals.
*For illustrative purposes only. The actual credit card or home equity line of credit (HELOC) secured may have additional or fewer benefits.
**Please consult with a tax advisor.