Can you take out a HELOC with high credit card debt?
There are lots of great benefits that come with tapping into your home's equity right now, from today's high home equity levels — the average homeowner has about $320,000 in equity currently — to the low average rates this type of borrowing offers. So when homeowners are struggling with mounting credit card debt, it can make sense to consider their home equity as a potential solution. In this situation, a home equity line of credit (HELOC), which works as a line of credit rather than a lump-sum loan, can be a particularly attractive option.
The allure of converting high-rate credit card debt into a HELOC is clear. After all, the average HELOC rate is sitting at 8.36% right now while the average credit card rate is hovering above 23%, so the interest savings alone could amount to hundreds or thousands of dollars over time. And when you add in the other benefits, like the borrowing flexibility that a HELOC offers and the potential for the variable rate to drop over time, it just makes sense to consider this strategy.
But the reality of qualifying for and managing a HELOC while carrying significant credit card debt isn't as straightforward. Having a large amount of credit card debt can make it difficult to borrow more money, as you can look like a risky bet to lenders. So is it possible to qualify for a HELOC if you have a hefty amount of credit card debt? That's what we'll break down below.
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Can you take out a HELOC with high credit card debt?
The short answer is yes, but it depends. While it's possible to obtain a HELOC while carrying high credit card debt, the qualification process can be challenging. Lenders evaluate several key factors when considering HELOC applications, and any existing debt you're carrying plays a significant role in their decision-making process.
Your debt-to-income (DTI) ratio is particularly important during the lending process. Most HELOC lenders prefer a DTI ratio of 43% or lower, meaning your total monthly debt payments shouldn't exceed 43% of your gross monthly income. But high credit card debt can push your DTI ratio above this threshold, making approval more difficult. However, some lenders may be willing to work with borrowers who have higher DTI ratios — provided that you have substantial equity in your home and a strong credit score.
Speaking of credit scores, while carrying high credit card balances typically lowers your credit score due to high credit utilization, you might still qualify for a HELOC if your payment history is solid and you meet other lending criteria. Many lenders look for a credit score of at least 620, though better rates and terms are usually available to those with scores of 700 or higher.
The amount of your home equity — and how much you want to borrow — is another critical factor. Most lenders allow you to borrow up to 85% of your home's value, minus the amount you owe on your mortgage. That's the maximum, though. If you have a high amount of card debt but are applying for a HELOC with a limit that's well below the 85% threshold, you may have a better chance of being approved.
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How to find the best HELOC rate with high credit card debt
Securing a competitive HELOC rate while carrying significant credit card debt requires a strategic approach and careful preparation. You can start by improving your credit score before applying. While you may not be able to completely pay down your credit card debt immediately, ensure all payments are made on time and try to reduce your credit utilization on individual cards to below 30%, if possible. Even a modest improvement in your credit score can lead to better HELOC terms.
It also makes sense to shop around, as HELOC rates and requirements can vary significantly between lenders. Local credit unions tend to offer more competitive rates and may be more willing to work with borrowers carrying higher debt loads. Online lenders are another option worth exploring, as they frequently offer competitive rates to attract borrowers.
Strengthening your application by documenting stable employment, regular income and any additional assets could also benefit you. Lenders are often willing to offer better rates if you can demonstrate strong income stability, even if your credit card debt is high. Just be prepared to explain your credit card debt situation and have a clear plan for how you'll manage both the HELOC and existing obligations.
The bottom line
Taking out a HELOC when you have high credit card debt can have its challenges, but it can also be a viable strategy for some homeowners. That said, it requires careful consideration of your financial situation and long-term goals. Before pursuing this option, evaluate whether you can realistically qualify given your current debt load and credit profile, and be honest about whether you've addressed the underlying causes of your credit card debt.
While a HELOC can be a powerful financial tool, it's not a magic solution for credit card debt — and in certain cases, it also makes sense to consider strategies such as debt consolidation loans or balance transfer credit cards, which might provide similar benefits without putting your home at risk.
