HELOC Strategy #1: The Credit Card Strategy
We’re listing the HELOC paydown strategies in order of popularity with consumers and efficiency. This one has the #1 spot locked down mostly because it’s simple to understand and creates the most efficient method of reducing the HELOC’s principal balance. So how does it work?
You set up your income to go directly from your employer straight into the HELOC account.
That means you need to find a HELOC from a bank that offers direct deposit to HELOC. There are very few banks that do, but we can put you in touch with one that does. This step is important because it helps you keep your balance as low as it can be for more days out of every year. You actually pay more interest without direct deposit.
You’ll need a credit card with a high enough limit to allow you to put all your daily expenses onto it each month. You may have this card in your wallet or purse today.
If you don’t know what your total monthly spending is, stop right here. You need to go find out immediately. Your income is your net income, so subtract what you spend from the amount you take home each month. If this cash is not positive, this HELOC strategy will not work for you. If you’re cash-flow positive (the more, the better!), then you’re still on track.
Specific to the credit card, you have an opportunity to choose which one will work for you best. Many choose a zero-interest card. This is fine. However, since you’re going to pay off the card in full every month before the billing cycle ends, that effectively turns every card into a zero-interest card. With that in mind, you have an opportunity to double-dip on the card. Get the card you want. Go for rewards: points, cash back, miles, etc. Take full advantage of those perks while paying the card off in full every month.
Again, knowing your spending budget is essential to make this work. Without discipline, this strategy won’t benefit you as much as it could.
Okay, moving on. Now you need to pay all your bills with that credit card. This includes all daily expenses like gas, groceries, etc. There may be a utility company or something similar that won’t take a credit card as payment. That’s fine. You can give them the routing number and account number from the HELOC, so funds can be drawn from it for that one-off expense.
Using this technique with the credit card is called “offset accounting.” By offsetting the debt, or using another account to pay that monthly bill, you’re keeping your principal balance as low as possible throughout the month. That way, you’re saving yourself money in billable interest.
Read that again. It’s a key principle, no matter which strategy you pursue.
Before your credit card cycle ends, but as close to it as possible, you need to pay the credit card off in full using the HELOC. Your HELOC should have an ACH feature that allows you to pay bills (like your credit card) using the account number and routing number from the HELOC. Worst case, you can write a check from the HELOC. However, posting times can vary – so you’ll want to time that payment correctly.
Paying the card off in full will ensure that you’re not charged interest on your monthly expenses. This will raise the principal balance on your HELOC by that amount. But if you time it close enough to your next pay cycle, you may only have that higher principal balance for a few days. Then, your next paycheck will knock the balance back down – and keep the interest on your average daily balance low.
Here’s what the credit card strategy looks like, using some simple math and real-world numbers.
Principal balance owed = $350,000 @ 6.53%
Monthly net income = $8,000
Monthly expenses + bills = $5,000 (includes an interest-only payment of $1,904.58 on the new HELOC)
So, in one pay cycle, you’ve paid in $8,000 and paid out $5,000 for a net difference between income and expenses of $3,000. This has reduced your principal balance to $347,000 in just a month.
Principal balance owed = $347,000 @ 6.51% (your rate went down slightly with a market adjustment)
Monthly net income = $8,000
Monthly expenses + bills = $5,000 (includes an interest-only payment of $1,882.47 – notice that your interest payment went down?)
Again, applying the net positive of $3,000, you’ll see your principal shrink to $344,000.
Principal balance = $344,000 @ 6.56% (your rate went up again – this reflects expected rate fluctuation)
Monthly net income = $8,000
Monthly expenses + bills = $5,000 (includes an interest-only payment of $1,880.53 – notice that the rate went up and your interest payment still went down!)
After your third pay cycle of $3,000 positive cash is completed, you owe just $341,000 in principal.
You’ve just paid your principal balance down by $9,000 in 90 days.
And you haven’t changed your income or expenses, just how you manage them. You’ve also seen a drop in the amount of interest you need to pay, because your principal balance is shrinking. Even when you factor in a rate increase from month 2 to month 3, you’re still paying less interest.
Run the numbers for yourself and test it based on your income and expenses. Math doesn’t lie. Here’s the link to our HELOC calculator. Go ahead, we’ll wait.
Now you’ve seen the credit card strategy work in real numbers. Hopefully, you’re hearing a quiet voice of confidence telling you that you can do this. Start to listen to it. Your combined discipline and strategy will allow you repeat this behavior each month. And, in time, you’ll see the benefits.
Above all, keep one fact in mind: this is a long-term goal. Not a short-term pot of gold.
Don’t be fooled by early success (or seeming lack of progress). If you’re following the strategy with positive cash flow, have confidence in it. Stay the course and live within your means.
But there’s still one thing we haven’t mentioned yet. The whole time you follow this strategy, you’re also building available equity in your home that you can easily access if needed or wanted. This dual benefit (starting to pay less in interest and more to principal while building equity) is starting to allow you to Control Your Equity™.
Sounds good, right?