Replacing a HELOC with a Credit Card

Posted by  on Feb 08, 2010

Banking industry analysts have observed a counterintuitive trend among homeowners. More Americans have started to make balance transfers to credit cards from home equity lines of credit (HELOC). Personal finance experts cite two specific situations where this unusual strategy might make sense for some borrowers.

Build Home Equity and Qualify for Refinancing

Homeowners who experienced property value drops while drawing on home equity lines of credit may discover that they don't have enough remaining equity to qualify for a refinance. Under normal market conditions, it might not make sense for you to transfer the balance of a HELOC to a credit card, especially if the interest rate on the credit card is higher. However, by making a balance transfer from the HELOC to a Visa or MasterCard, you can save enough interest on a refinance deal to mitigate the short-term bounce in credit card interest.

Shifting Business Exposure to Credit Cards Instead of Secured Loans

A recent CNN report profiled couples who used cash from home equity to bankroll small businesses. In each case, couples effectively put their homes at risk every time they used HELOC funds to cover payroll or to purchase inventory. Instead, small business advisors recommend financing businesses by building credit in a company's name. Despite reports of a credit crunch among small business lenders, plenty of banks have capital to fund credit cards for established businesses. Restructuring your business debt into a dedicated company credit card can also protect your family's assets in the event of a lawsuit or an insurance claim.

A diverse credit profile often reduces risk in the eyes of lenders. Transferring some of a HELOC balance to a credit card may cause a short term dip in credit scores, especially when algorithms account for a sudden boost in available credit. However, over the long run, managing debt across a variety of credit card and mortgage accounts can indicate a responsible relationship with money.

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