Home Equity Lines of Credit vs. Credit Cards
While both sources of financing - home equity lines of credit and credit cards - are revolving, or open-ended, and therefore can be used for the same types of expenses, it is important to know the differences between them so you can use them as wisely as possible.
Similarities
The similarities between home equity lines of credit and credit cards include:
• They are open-ended. With both, you have ongoing access to your funds. Therefore, you can use both of them to finance ongoing expenses. (There are limitations to this, which are explained below.)
• They have special rates. Both can offer low introductory rates.
• They have variable interest rates. On both, the interest that you pay is variable. That means that it is tied to a specific index; in most cases the prime index is used. When the index drops, your interest rate drops, and when it goes up, the rate goes up.
• They have card offers. Obviously, when you have a credit card, it is the medium through which you access your credit. Similarly, with a home equity line of credit, you have the option of getting a card to access your line of credit.
Differences
Following are some of the differences between home equity lines of credit and credit cards:
• Limitations. Most home equity lines of credit have a specific period in which funds can be accessed, whereas credit cards do not.
• The level of interest rates. The interest rates on home equity lines of credit are typically a lot lower than those on credit cards.
• Tax benefits. The interest on a home equity line of credit is usually tax-deductible, whereas that on a credit card is not.
Do’s
• Many consumers are using their home’s equity to help fund their children’s college education. This is a great use of it because it is a good investment in their future.
• Another very popular use of a home equity line of credit is to finance a home improvement or renovation project. The benefit of having access to your funds can be combined with the benefit of putting money into your house and increasing its value and its equity for future use. So, in a way, you are giving the money back to yourself.
Don’t’s
• Even though you can use your home equity line of credit like a credit card, that does not mean you should. Let your credit card cover everyday expenses, and use your home equity line of credit for large purchases, such as home renovations or college tuition.
• Because of the difference in interest rates, some people advise using a home equity line of credit.
Source: Informa Research Services