HELOC Strategy #2: The Operating Account Strategy

The second most popular strategy for paying down a HELOC is commonly referred to as the “operating account strategy.” It’s similar to the credit card strategy, but has even fewer moving parts. This strategy truly replaces your current checking account with the HELOC account. No credit card needed, no offset accounting.

Basically, you’ll run your day-to-day finances through the HELOC – just like you use your traditional checking account today. Some borrowers prefer this method because it keeps all their transactions in one place. They find it easier to keep track of their budget, spending, and balance that way.

This is where it differs from the credit card strategy:

Paying all your expenses from the HELOC as they occur, you do lose some interest savings. Yes, your principal balance will drop with every paycheck. But then it’ll slowly tick up throughout the month as you pay bills and buy what you need. As you’ve learned by now, HELOCs use simple interest – interest calculated based on the average daily balance of the amount owed.

The consequences of using the credit line as a day-to-day account can be significant, depending when your expenses hit. Your average daily balance will be slightly higher each month than it would be if you used an offset accounting method (like the credit card strategy). As a result, you’ll spend slightly more in total interest.

However, the ease of accounting for all your income and expenses in one place may be worth it to you.

If you’re not too concerned about that small interest increase, here’s how to employ the operating account strategy.

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.

To use this method, your HELOC account needs to come with a debit card or access card tied to the account. You also need a checkbook and online account access. If you’re considering a HELOC and it doesn’t come with those minimum requirements … find another bank. Simple as that. You need all three to be able to pay bills, make daily purchases, and track your spending and balance.

We’ve said it a bunch of times, and we’ll say it again. If you don’t have a budget in place, if you don’t know how your monthly net income compares to your bills and expenses, please stop. Your cash flow needs to be positive number, or this HELOC strategy will not work. And you’ll get frustrated or fail. Be honest with yourself.

Even if you’re not in the right position today, there’s no reason you can’t be soon.

Set a budget and work down your debts to get yourself into a solid position for success. Then, come back to this strategy. It’ll still be here.

You’re going to use the account just like you would your current checking account. The checks allow you to pay bills as needed, the debit or access card allows for point sale transactions like groceries, gas or getting cash out, and the online access helps you track it all.

Your HELOC should also have an ACH function to allow to pay bills online using the account number and routing number. In addition, you should be able to set up a bill pay. It can save you the headache of writing a check and waiting for it to post.

Using the same numbers as the credit card strategy, here’s how the math works.

Keep in mind that these numbers will be different for you – because your average daily balance would be higher as you pay bills and buy needed items throughout the month. It’s just impossible for us to replicate that here. Unless, of course, you provided your weekly budget plus expenses. That’s something your lender should be happy to work through with you.


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.*

*Given a static budget. Your unique expenses and income will differ from this scenario.

As you can see, your interest savings are still significant – and definitely better than what you’re doing today. It’s almost impossible to project out your individual scenario in this model, because everyone’s expenses and spending habits in a month are different. So we’ve made some general assumptions to show value.

This model allows you to consolidate your accounts. It’s a simple in-and-out system with everything in one place. Like usual, you need to have a clear understanding of your monthly spending and budget in order to succeed.

Just like the credit card strategy, this strategy gives you access to equity in case you need to make a big purchase, or if you want to invest in an opportunity. It should also give you peace of mind. You’ll know that you have a safety net just in case something in your life goes sideways.

Stay disciplined! Stick to your plan and you’ll meet your goals.

Life happens when you’re busy making other plans.

– John Lennon