Many people turn to credit cards or loans when they don't have enough cash to purchase items they need or want. It's never a good idea to rely on credit cards for frivolous purchases, but there may be situations where you need fast cash. Two ways to get your hands on credit when you need it are credit cards and home equity lines of credit (HELOCs). Here are some of the similarities and differences between these two methods of borrowing money.
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Credit Card Offers
Credit cards are basically unsecured loans. You swipe a piece of plastic to make purchases and sign for them. Your signature allows the purchase to be deducted from your credit line and serves as a guarantee to repay the loan. Because no collateral is involved, you won't lose any assets if you default on your agreement to pay off the credit card balance.
While it is easy to use credit cards, rates on them tend to be high. When you miss payments, credit card companies automatically increase interest to the default rate, which could be around 30% or more depending upon your situation. There are cheaper options for borrowing money than credit cards, but many people rely on them because they are relatively easy to get.
HELOC and Your House
If you own a home you may be able to qualify for a HELOC, which is a home equity line of credit. Like a credit card, the HELOC can be used any time. You can access funds with checks or a debit card. A HELOC uses your home as collateral, and is basically a second mortgage. That means that if the loan isn't repaid, you could lose your house. It is risky to borrow money with a HELOC if you aren't sure there is enough income coming in to keep up with the payments.
Some people like to set up HELOCs in case they need the money down the line. This could be wise if you think that your income may decline at some point, making it tough to qualify for a loan. Credit card rates are usually higher than interest on a HELOC, which may have an adjustable rate.
HELOC and Credit Card Terms
Read through HELOC and credit card terms carefully when considering borrowing money. The terms should give all the information you need about interest rates, fees, penalties, etc. Never sign up for a credit card or HELOC without understanding how much it is going to cost over time.
The original article can be found at IndexCreditCards.com:Credit cards vs. home equity line of credit