By SCOTT BURNS
Houston Chronicle News Service
8/9/04

Lenders are lined up at our mailboxes. They offer new credit cards, new mortgages and new home equity loans. They do this because it is very profitable.

This is worth considering.

Perhaps "un-borrowing" would be a profitable activity. Maybe interest saved by not borrowing will provide a higher return than what we can get by saving and investing.

Indeed, I believe that is what the market is telling us.

Recall last week, when I demonstrated that the after-inflation, after-tax returns on money market funds, typical bonds and average stocks were minus 3.15 percent, minus 0.9 percent and a mere 2.4 percent, respectively. Well, let's see how those returns stack up against what we can save by not having to pay interest on debt.

We'll start with the big no-brainer: credit cards.

According to bankrate.com, a site that tracks the returns for saving and the costs for borrowing, the average interest rate on fixed-rate cards is now 12.72 percent, which is not deductible. Adjust that return up for taxes and typical "convenience credit" costs 16.96 percent. Pay it off, and that's the effective return for you and me as borrowers. Even if you adjust it downward for inflation, it beats anything we can earn on our savings.

The story is the same with car loans. Pay off an average 5.91 percent car loan, and you have a good "investment." You'd have to earn more than 7.88 percent on your savings to offset the cost of borrowing.

If you happen to be one of the many homeowners whose itemized tax deductions aren't deductible because they are less than the standard deduction, this is close to what your mortgage is costing you. You'd clearly be better off paying it down — and using your savings to do it.

And what about the tax-deductible mortgage? New 30-year mortgages currently cost about 5.65 percent. If the interest is tax-deductible and your interest deductions exceed the standard deduction, the effective cost of borrowing is 4.24 percent. Subtract 3.9 percent inflation, for paying the loan back with ever-cheaper dollars, and borrowing costs only 0.34 percent.

It could be argued that borrowing for home mortgages is cheap.

On the other hand, a net return of 0.34 percent (rate less tax savings) is still better than you'll do in money market funds or most fixed-income investments. So paying off tax-deductible mortgages is still a good idea.

The bottom line here is very simple.

If you're carrying credit card debt at any interest rate, stop. Give paying off the credit card debt highest priority.

The same goes for paying off anything except a zero percent car loan.

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