New Card Puts Home Equity In Your Wallet Failure To Pay Could Put Users Out In The Street

Forget low interest rates. Forget no fees. Forget those frequent-flier miles. A Pennsylvania bank is offering a credit card that taps an even more basic consumer desire: skirting taxes.

Sovereign Bank said it has begun peddling the “Tax-Deductible Credit Card,” a concept Congress presumably outlawed when it banned deductions for personal interest starting in 1991.

Sovereign Bank’s card dodges that problem because it is a home-equity line of credit, not a standard consumer loan.

Since the 1986 tax overhaul, taxpayers have been allowed to deduct interest payments on home-equity loans up to $100,000 on their federal returns regardless of what the money is spent on.

If Sovereign’s offer sounds tempting, however, experts warn it could have disastrous side effects because it’s like carrying around your house in your wallet. While standard credit accounts are unsecured debts that are waived in bankruptcy, equity loans are secured by your home.

“It’s really dangerous for consumers,” said Gerri Detweiler, author of “The Ultimate Credit Handbook.” “Most people underestimate the amount of debt they carry and how much they’re paying for that debt.”

The key to avoiding this plastic trap is to pick the most suitable card offer, not just the most tempting one.

If you’re eager to deduct your interest expenses and you have equity in your home, for instance, one option is to take out an equity loan, then dump the money into a “secured” credit card backed up by the deposit.

Or you might be wiser to refinance your mortgage and siphon off money for your spending plans or to consolidate existing credit-card bills. If you consolidate your bills, however, take care not to dig yourself deeper in debt.

“I could see some advantages to this (Sovereign) card - if you’ve got the discipline to not consider it found money, if you’re certain you would never go bankrupt, and if that interest deduction is valuable to you,” said Ginita Wall, a personal finance author who heads the Women’s Institute for Financial Education in San Diego. Otherwise, “It’s keep it simple, stupid.”