Clark Howard's Tips

The dangers of home-equity borrowing

August 19, 2008

Have you ever used your credit card and been asked for ID or told you'd have to make a minimum purchase? Both stipulations are against the merchant guidelines that govern Visa and MasterCard.

Clark is not upset when he's asked for ID; he sees it as another safeguard, even if it is against the guidelines. However, there is some recourse available if you are peeved.<

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The economic news today is frightful. Wholesale prices of goods rose at the fastest level in 27 years. Retail has also reported dismal signs, including J.C. Penney, Target, Home Depot, Staples and more.

But Clark wants to take the headlines down to an individual level. He wants you to see how your decisions cause financial heartache and how you can change your behavior. The core of his message is, of course, save more and spend less!

New stats from the Federal Reserve show that the average American only has about 40% equity in their home. 20 years ago, we had 75% equity in our homes. But that all changed when banks started pushing home-equity borrowing like a dealer pushes illegal drugs.

People were only too happy to borrow for lifestyle. Now the banks are in a tight spot. We're defaulting on our home-equity lines left and right. Banks are losing money when they foreclose, but what choice do they have when we're not paying anymore?

We need to do a hard restart in our brains. Some people think it's a good idea to borrow home equity at a low rate to pay high-interest credit cards. But doing so only frees up the credit cards so you can charge them up again, plus it creates a deficit against your home.

There isn't really a quick solution; you've got to climb out of debt step-by-step. You didn't get into debt overnight and you won't get out of it that way. It all comes down to this: Do not use borrowed money to achieve a desired lifestyle.

You've got to come up with your own deterrent -- think of it as financial electric shock therapy -- when you're contemplating spending money you don't have.

More Clark Howard Credit and Banking Tips The dangers of home-equity borrowing  ID checks, minimum purchase rules a no-no with credit cards  The Mortgage Lender Implode-O-Meter  Advance-fee loans are back with a vengeance  Wachovia, WaMu say goodbye to option payment loans  Cycling your unused credit cards back into the mix  Banks offer diverging interest rates on savings and CDs  Mortgage bailout proposal to help banks, not homeowners  Credit limits being reduced without your knowledge?!  65 million paying for credit monitoring/fraud alert services  Full list