Family Matters

My husband just told me about a new form of credit card that is tied to the equity in your home. The advertisement says the interest is tax-deductible. I'm nervous about using a card like this, but my husband still seems interested. What do you think?

I recently heard an ad for something very similar to this and I groaned as I thought of all the people who could fall into this trap. Here is what you're being offered and why you would be wise to reject the offer.

As you probably already know, most credit cards are “unsecured.” This means that, if you fail to keep up with payments, the credit-card company has no right to repossess your car or home as a method of obtaining payment.

The card you're now being offered, meanwhile, uses the hard-earned equity you have built up in your home to provide you with a line of available credit. This line of credit will be secured by your home. If you miss payments, you could lose your home.

And that's not the only negative. The promoters will encourage you to use the line of credit in multiple ways, including the consolidation of existing credit-card debts, home-improvement projects, college tuition and even such discretionary spending as expensive vacations. The advertisement I heard even mentioned how a couple saved money when buying a boat because the interest was tax-deductible. The fallacy of this is that you only save a portion of your interest charges when you deduct them (based on your effective tax rate). You still pay heavy interest charges.

One of the biggest negatives I am concerned about is that uncontrolled spending put on these cards will wipe out the hard-earned equity (a.k.a. “sweat” equity) you have built up in your home. Credit cards are just too easy to use for a myriad of expenses (most with no long-term value) and most people have a very difficult time limiting their spending when they have access to a credit card. It is so easy to go on a spending binge and rack up thousands of dollars in debt in a short period of time. Usually, the ramifications of such actions last for years.

If you haven't fallen into this trap yet, I encourage you to avoid it. If you already have a credit card like this, or have already tapped the equity in your home for things you now wish you hadn't, don't lose heart. Eliminate the card and make a commitment today to get yourself on a budget and develop a debt-repayment strategy that works your consumer debt down as soon as possible.

While becoming debt free takes time and effort, the rewards of financial freedom are worth the short-term sacrifice. God love you!

Philip Lenahan is director of media and finance for Catholic Answers in El Cajon, California.