credit cards

Tax-deductible interest?

Wednesday, May 13
Posted 2 p.m.

Yesterday, reader Brian from Missouri e-mailed me with this question:

I am old enough to remember that when my wife and I first got married we were allowed to take off our credit card interest on our tax return. If our President wants to help the average person, let him allow us to take the interest off our credit cards once again. Do you think this subject was even brought up for discussion?

Credit card interest was tax-deductible until Reagan's Tax Reform Act of 1986, which removed that deduction from all consumer loans except mortgages. At the time, interest rates on credit cards were in the 19 percent range. Ironically, this move probably fueled the credit card business. To have people continue to use cards without being able to deduct the interest they'd paid, issuers would have to lower the interest rates. So that's how we got down to the relatively low rates we've had for a couple of decades now.

But Brian's question is interesting. What if a tax deduction for credit card interest paid was allowed for, say, five years? Would people pay off their cards or use them more? My feeling is they'd probably use them more, reasoning that they're really not paying the interest because they're deducting it in April.

A couple of bloggers have suggested that the government should allow interest to be deducted to help people get out of debt faster. Others have said that an interest deduction would encourage consumers to spend again.

What do you think? E-mail Plastic_Rap@Bankrate.com.

Happy birthday, Barry Zito! Hope you pitch well this afternoon!

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