Major lenders see future in home-equity credit card

Nation's Housing

April 30, 2000|By Kenneth Harney

SHOULD YOU pay for your groceries, your restaurant tab, your gas tank fill-up, and your medicine at the drugstore by hocking your house with a Visa card? Would you do it if you got frequent-flier miles thrown in? Consumer advocates don't like the idea, but some major lenders are banking on it: Real estate equity-linked personal credit cards could turn into the next hot trend for U.S. homeowners.

The rationale is intriguing. When Congress ended tax deductions for consumer credit in the Tax Reform Act of 1986, some legislators hoped it would discourage high-cost credit card and other personal borrowings. The same law retained tax deductibility for mortgage borrowings secured by a principal residence, up to a general limit of $1.1 million of mortgage debt.

In the intervening years, home-equity loans -- mainly used to finance big-ticket expenditures and home improvements -- have boomed. So have American Express, MasterCard, Visa, Discover and other credit cards.

But lenders see a huge market for what they believe is the ultimate credit combination: credit cards that carry interest rates on balances at one-third or less than rates on regular cards. The new cards offer rates comparable to home mortgages, and qualify for tax deductions on interest payments under federal law.

Whereas Visa or MasterCard balances often carry nondeductible interest rates of 18 percent and 19 percent, the new home-equity cards carry rates in the 9.75 percent range and are tax-deductible. Homeowners in a combined 40 percent federal and state tax bracket might pay an effective rate on home-equity Visa card charges in the 5.5 percent range, rather than 18 percent or 19 percent. And they might earn frequent-flier miles on top of that.

Home-equity lines that are accessible by credit cards -- as opposed to the predominant checkbook or bank draft method -- are not new in themselves. But now some of the country's most powerful lenders see home-equity plastic as a major new way to go after and retain homeowners as mortgage and financial services customers.

Take the new "On the House" Visa card launched early this month by the country's fifth-largest mortgage originator, Washington Mutual Bank. The card, embossed with a picture of a house to distinguish it from other plastic in your wallet, carries a "teaser" rate for the first six months of 5.99 percent. The regular rate after six months is prime plus anywhere from three-quarters of a percentage point to just less than 1 percentage point (currently 9.74 percent to 9.99 percent). Homeowners with high credit scores can qualify for rates less than 9.5 percent.

The "On the House" card is a platinum card on steroids: Forget credit limits of $10,000, $25,000 or $30,000. Depending upon the value of your home, your new Visa credit line can go to $500,000 or more. You can use it just like any Visa card in restaurants, hotels and shopping malls. But you can also use it on a $120,000 Porsche or a 30-foot deep-sea fishing boat -- as long as the merchant involved accepts Visa cards. The card is good for 10 years and may soon get add-on features like frequent-flier miles, according to Pamela J. Gavin, the Washington Mutual official who's running the program nationwide.

But is this a good idea? Is home-equity plastic what Congress had in mind when it banned tax deductions for auto loans and credit cards?

Stephen Brobeck, executive director of the Consumer Federation of America, doesn't like the concept. "It makes it entirely too easy," he says, "to spend the hard-earned savings that you've accumulated in your home, savings that most people need for their retirement years." One remedy to the potential risks to consumers, according to Brobeck, would be for lenders to cap the maximum balance homeowners could draw down "at some reasonable amount, like $5,000."

Given the huge equity values stored up in millions of homes, lenders seem unlikely to heed Brobeck's suggestion any time soon. Defenders of equity-secured credit cards argue that they represent a far better economic deal to the consumer than ordinary cards and that defaults and foreclosures on home equity-credit lines historically have been very low.

The bottom line for you? Don't be surprised if you're asked in the near future to make the big switch with your Visa or MasterCard. But read the fine print and ask yourself this: Are you currently running balances on your Visa or MasterCard, or do you pay off your charges every month? If you don't carry balances, shifting to an equity card may not save you a penny. In fact, since home-equity cards rack up a balance subject to interest charges with every purchase you make, you could spend more on interest than you do today.

Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.

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