If one of the largest banks in the country has its way, homeowners won't have high-interest credit-card balances to worry about in the coming decade.
That's because houses will function as the ultimate piece of plastic: In the words of Wells Fargo & Co. Senior Vice President Colin Walsh, "home equity will become the credit card" of the future, thanks to a new wave of high-tech "credit-balance transfer" programs heading your way.
With virtually no fanfare, Wells Fargo has begun getting in touch with its $14 billion home-equity-loan customer base and offering homeowners the opportunity to convert all of their outstanding credit-card balances to their equity account--up to 100 percent of the market value of their homes--electronically and within seconds.
Rather than paying 18 percent on their credit-card balances, the homeowners can, in seconds, switch their card debt to a tax-deductible equity line at 8 percent to 10 percent. Factoring in the tax-deductibility of the interest, the effective cost of the debt for many cardholders can drop to 6 percent from the high-teens.
So what's new here? Don't you already get teaser-rate pitches in the mail from credit-card companies that offer to switch your card balances to a new card for 5.9 percent for the next six months? Sure you do, but what Wells Fargo has started--and other major banks are certain to copy--is very different.
Never before have commercial banks used sophisticated technology to search out consumers' credit-card debt balances and convert them electronically into mortgage debt. The pitch to consumers is so tempting that since mid-April, Wells has converted $300 million in MasterCard, Visa, Discover and other card debt--mainly held by other banks--into home-equity debt held by Wells. And that's just in the program's initial test area of California, Oregon, Washington and Idaho.
Once the program is taken nationwide during the coming year, Walsh predicts the change in consumer debt behavior "will be revolutionary." Put another way: Once it becomes easy to turn your credit-card balances into tax-deductible home-equity balances, why would anyone who owns a house keep paying 18 percent? You'll simply direct your home-equity bank to turn those balances into mortgage debt. The bank will pay off your credit cards and add to your home-equity balance.
In a way, the Wells Fargo program represents the culmination of a trend that was triggered by the 1986 Tax Reform Act. That law eliminated the tax-deductibility of interest on all consumer debt but retained it for home mortgage debt.
In the years since that change, home-equity borrowing has boomed. But until now, banks lacked the technology to rapidly convert credit-card balances into mortgage balances. Consumers taking out home-equity loans have had to pay off card balances themselves, via checks sent through the mail.
To carry out its program, Wells Fargo has hooked up with a New Jersey-based firm, Response Data Corp., that specializes in electronic and Internet payment services. Response Data is plugged into a national electronic account-payment system linking thousands of customers of Visa, MasterCard, American Express, Discover and other creditors.
When a customer provides Wells Fargo with the name of the credit-card issuer, the account number and balance, Response Data is able to tap into the network and pay off those balances with Wells Fargo's money within seconds. The balances are then moved electronically onto the customer's home-equity account.
All this may sound very cutting edge, but does converting credit-card debt into mortgage debt really make sense for consumers? Purely on a cost-of-credit basis, it does.
But there are disquieting aspects to all this: First, after you hock your home to the hilt with equity debt, will you have the discipline to stop charging on your plastic? The statistical evidence isn't encouraging: Last year, the Atlanta-based research firm Brittain Associates found that of the 4.2 million households who used equity loans to pay off some or all of their credit-card debt during a two-year period, two out of three allowed their credit-card balances to creep back up again, increasing their overall household debt.
Wells's new balance-transfer program has no restrictions against card-balance "reloads," Walsh said, but the bank is monitoring its customer credit files to see whether this becomes a problem.
Second, home-equity debt, while unquestionably cheaper than credit-card debt, is also potentially more toxic. Fail to pay on an equity line and you can lose your house. Fail to pay on a credit card, and you may get nasty letters and calls from debt collectors. But you'll keep the roof over your head.