The gap between these two is larger than almost any other number in personal finance, and most people carrying both have never put them side by side.
The comparison
A typical credit card sits near 19.99 percent. Store cards run higher, often into the high twenties. A HELOC is priced at prime plus a small margin, which puts it in the mid single digits.
Call it roughly a fifth of the cost of the same borrowed dollar.
What that does over a year
Carry 25,000 on cards at 19.99 percent and the interest alone is around 5,000 a year. The same 25,000 on a HELOC in the mid fives costs somewhere near 1,400.
That is about 3,600 a year, or 300 a month, for making no change other than where the debt sits.
Why the difference exists
Not greed, security. A credit card is unsecured. If you stop paying, the issuer has no property to pursue and prices that risk into everyone’s rate. A HELOC is registered against your home, so the lender’s risk is far lower and the rate reflects it.
That is also the honest warning. The reason it is cheaper is that your house is the collateral. Missing payments on a card damages your credit. Missing payments on a HELOC eventually threatens the roof.
The other trap
Credit card minimums are set at a level that keeps you paying for a very long time. On 25,000 at 19.99 percent, paying only the minimum can take decades and cost more in interest than the original balance.
A HELOC minimum is interest only, so a balance left alone never shrinks at all. Both products will happily let you tread water. The HELOC just charges you less to do it.
How to use the difference properly
Move the balance, then keep paying the old payment. If you were paying 700 a month on cards, keep paying 700 on the HELOC. The interest portion collapses and the rest attacks the principal, and the balance disappears years earlier.
Move the balance and pay the new minimum instead, and you have made your month easier while extending the debt indefinitely. Same tool, opposite outcome.
If you are carrying card balances and own your home, would it help to see what the difference is worth on your actual numbers?
General education, not financial advice. Figures are illustrative and subject to lender approval (O.A.C.). Lora Fenn, Mortgage Agent Level 1, Lic. #M25003153. Dominion Lending Centres YBM Group, FSRA #11129. 705-881-2780 · lfenn@dominionlending.ca
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