HELOC vs. 0% Interest Credit Card

When deciding between a HELOC and a 0% credit card, it’s crucial to consider your financial situation, borrowing needs, and repayment capacity. Factors including the amount you need, how soon you plan to repay, and your comfort with variable interest rates can have a massive influence on your choice.

We’ll explore how HELOCs and 0% credit cards work, their advantages and disadvantages, and scenarios best suited for each. This information will help you decide which financial tool better aligns with your goals and current financial health.

How HELOCs vs. 0% interest credit cards compare 

HELOCs (home equity lines of credit) and 0% interest credit cards serve different financial needs and offer distinct advantages based on the borrower’s situation. While both can provide access to funds and liquidity, the source of the credit, cost over time, and potential uses differ.

Here are important differences between HELOCs and 0% interest credit cards:

• HELOCs are based on the borrower’s home equity, often allowing larger borrowing amounts and longer repayment periods. They tend to have variable rates, meaning the interest costs can fluctuate over time. HELOCs are often used for significant expenses, such as home renovations or debt consolidation.
• 0% interest credit cards offer an interest-free period ranging from six to 18 months, but the credit limits are often much lower than HELOCs. After the promotional period, higher rates apply. These cards are relatively easy to access and ideal for more minor, short-term expenses.

The table below summarizes the differences between HELOCs and 0% interest credit cards to help you decide which option suits your financial needs better.

Detail	HELOC	0% credit card
Collateral required?	Secured by your home	Unsecured
Credit limit	Higher, based on your home equity	Lower, due to no collateral
Interest rate	Variable: lower in the long run than a credit card	Variable: starts at 0% but can increase to a high rate
Repayment term	Long, can often be repaid over 20 – 30 years	Short, should ideally be repaid during 0% period (e.g., 6 – 18 months)
Best uses	Large expenses, long-term financing	Small expenses, short-term financing

How does a HELOC work?

A HELOC is a type of secured loan where a borrower uses their home as collateral for a revolving line of credit. Unlike a mortgage or other term loan, a HELOC offers a flexible credit limit that can be borrowed against, repaid, and borrowed again during the draw period, often lasting up to 10 years.

Some of the most important aspects of a HELOC are:

• Interest and payments: During the draw period, borrowers can access funds up to the maximum limit and usually make interest-only payments. After the draw period, the loan enters the repayment phase, requiring principal and interest payments.
• Accessing funds: Funds from a HELOC can be accessed via checks, credit cards issued by the lender, or by transferring money to a bank account. This flexibility allows homeowners to manage the line of credit as needed for various expenses.
• Flexibility and risks: The flexibility of a HELOC is moderated by the risk of borrowing against the value of your home. Also, since HELOCs often have variable rates, monthly payments can increase if rates rise. Understanding this balance is crucial for managing a HELOC responsibly.

While a HELOC can be a terrific funding option, weighing the pros versus the cons is essential. You should also consider how you plan to use the HELOC as you evaluate the type of financing to use.

Pros and cons of a HELOC

As you’re evaluating whether a HELOC is right for you, consider the pros and cons.

Pros

• Flexibility

  You can draw funds as needed during the draw period, providing flexibility for ongoing projects or expenses.

• Lower interest rates

  These are typically lower than credit cards and unsecured loans because the home serves as collateral for the HELOC.

• Tax benefits

  The interest you pay might be tax-deductible if you use the money for home improvements and itemize deductions when you file your tax return rather than using the standard deduction. This only makes sense if itemizing results in a greater tax deduction.

Cons

• Risk of foreclosure

  Failure to repay the loan can lead to foreclosure because the home is collateral.

• Variable interest rates

  Payments can vary, potentially increasing over time.

• Potential for overspending

  Easy access to funds can lead to overspending and financial strain.

What is a HELOC best for?

A HELOC is best used for significant, ongoing expenses where borrowers might not know the total cost upfront, such as home renovations, entrepreneurial ventures, or consolidating high-interest debt. 

Its flexibility makes it ideal for projects that require funds to be drawn over time, provided the borrower can manage the variable interest rate and repayment terms. 

For those who can maintain strong financial discipline, a HELOC can be a helpful tool to leverage your home equity to cover substantial financial needs.

How does a 0% credit card work? 

A 0% interest credit card offers a promotional period during which no interest is charged on purchases, balance transfers, or both. This promotional period often lasts between six and 18 months, depending on the card issuer’s terms. 

During the promotional period, the borrower must still make minimum monthly payments on their balance. Any remaining balance after the promotional period accrues interest at the card’s regular rate. 

Plus, depending on the promotion and the card issuer’s terms, the borrower may owe all the deferred accrued interest if they don’t repay the balance by the end of the promotional period. It’s essential to read the terms and make a plan to repay the balance before the promotion ends.

Additional details about important aspects of a 0% credit card are:

• Credit approval and limits: Approval for a 0% credit card depends on the applicant’s creditworthiness, which also influences the credit limit. It’s important to read the terms carefully. Failing to make payments can prematurely end the 0% interest offer.
• Transition to regular interest: Once the promotional period ends, the interest rate switches to the normal rate specified in the card agreement. This can be a significant increase, especially for borrowers who have not paid down their balance.
• Strategic uses: These cards are handy for managing short-term debt and large purchases paid off before the promotional period ends. However, planning for the end of the 0% interest term is essential to avoid unexpected interest charges.

A 0% credit card offers significant advantages, but it’s important to consider the potential pitfalls. It’s essential to balance the pros and cons. A 0% credit card is best for short-term uses, so it’s also crucial to consider how you plan to use the funds.

Pros and cons of a 0% credit card

As you’re evaluating whether a 0% credit card is right for you, consider these pros and cons.

Pros

• Interest-free period

  Allows significant interest savings if the balance is paid off during the promotional period.

• Credit flexibility

  Useful for large purchases or emergency expenses without immediate interest.

• Budget management

  Facilitates better budget management by allowing you to spread out your payments without paying interest.

Cons

• Interest rate shock

  Interest rates after the promotional period can be high, causing the cost of remaining balances to skyrocket.

• Temptation to overspend

  The initial absence of interest might encourage more spending than planned.

• Credit score impact

  High utilization of the credit card limit can lower credit scores.

What is a 0% credit card best for?

A 0% credit card is best for planned purchases or expenses the borrower is confident they can repay within the promotional period. 

It’s an excellent option for managing cash flow without incurring interest, such as buying household appliances, covering unexpected medical expenses, or consolidating higher-interest debt from other credit cards. 

For disciplined borrowers, a 0% credit card offers an effective way to make large purchases while avoiding the cost of interest, provided they have a solid plan to pay off the balance before the standard interest rates apply.

HELOC vs. 0% credit card: Which should you choose? 

Deciding between a HELOC and a 0% credit card depends on your financial needs, the amount of money you need to borrow, and how soon you can repay the debt. 

Consider a HELOC for larger, long-term expenses secured against your home’s equity and a 0% credit card for smaller, short-term expenditures you can repay quickly.

As you’re evaluating which option is right for you, also consider these factors:

Amount and term

HELOCs generally offer a higher credit limit and a longer repayment term, which is beneficial for substantial expenses, such as home renovations or tuition fees. On the other hand, 0% credit cards are suitable for short-term financial needs.

Rates and risks

While HELOCs have variable interest rates, they tend to start lower but can increase over time. If you’re uncomfortable with uncertain monthly payments, a 0% credit card provides a fixed period without interest. However, rates can surge after the promotional period ends.

Financial management

A HELOC requires disciplined repayment because it involves your home as collateral, posing a higher risk. A 0% credit card, although less risky in terms of collateral, requires strict budget management to avoid spiraling costs once the promotional period expires.

Here’s a summary of situations when you should choose a HELOC versus a 0% credit card:

Choose a HELOC if	Choose a 0% credit card if
You need to finance large, long-term projects.	You have short-term financial needs.
You can manage variable interest rates.	You can pay off the debt before the promo ends.
You prefer a longer repayment period.	You want to avoid any collateral risk.

Our expert’s advice for structuring repayment

Erin Kinkade

CFP®

For a HELOC, it depends on the amount borrowed, but I recommend factoring the minimum payment into your budget during the draw period and paying toward the principal in periods of excess cash flow. Also, ensure you can make the minimum payment during the repayment period. If this includes interest and principal, and if you can pay more toward the principal during periods of excess cash flow, that’s ideal. For 0% credit cards, I typically recommend using a credit card with a 0% introductory period of at least 12 months and, ideally, an 18-month introductory period. Then add a line item to your budget that equals paying off the credit card within the introductory period, and as with a HELOC, try to pay more toward the credit card balance in periods of excess cash flow.

Your choice should align with your financial situation and goals. A HELOC is more suited for substantial investments that increase home value or provide long-term benefits, while a 0% credit card is ideal for managing cash flow and smaller expenses without interest. 

Always consider your ability to manage the repayment and the potential risks involved in each option.