When they do their income tax returns this year, quite a few Americans might be prompted to think about changing their borrowing habits.

Time was when just about every cent of interest you paid was a simple deductible expense, and the deduction helped reduce the cost of credit. But those days are gone.In the aftermath of tax reform, there are five distinct categories of interest expense, only one of which qualifies as fully deductible without limits.

And two people borrowing identical amounts of money at the same nominal interest rate can wind up paying substantially different after-tax amounts for their loans.

Credit card payments, auto loans and other familiar types of credit used by individuals to buy goods and services come under the heading of consumer interest.

For 1988, you can deduct 40 percent of the consumer interest you paid. That drops to 20 percent in 1989, 10 percent in 1990 and nothing in subsequent years.

If you borrow to finance an investment, by contrast, the interest remains deductible in amounts that don't exceed your investment income by more than $2,000 for 1989.

If you borrow against your primary or a second residence, mortgage interest is still fully deductible up to the point where the amount of the loan reaches $1 million. Similarly, interest can be deducted on home equity loans of up to $100,000.

Then there's category No. 4, "passive activity" interest, which arises when you borrow to finance an investment such as a limited partnership that operates a business in which you aren't an active participant.

This kind of interest was a prime target in the legislative campaign against "tax shelters." Rather than a deduction, it is deemed part of the business's costs when its income or loss is calculated.

The only type of interest still deductible without exception is interest paid by a trade or business.

"Clearly the least attractive type of interest expense is consumer interest," says William Brennan, editor of the Financial Planning Reporter newsletter at the accounting firm of Ernst & Whinney in Washington.

"If you have any spare cash, consider paying off consumer debt immediately."

People who want or need to borrow, Brennan argues, should look first to home equity loans if they have access to them, since home equity loan interest still qualifies for a deduction.

The main knock on home equity loans is that they expose a precious asset to the threat of foreclosure if you can't keep up timely payments on what you borrow. Also, all home equity loans are not created equal - some are loaded down with fees and charges that make them more costly than they look.

Still, says Brennan, the deduction can mean a significant savings. On a consumer loan at 12 percent interest, a person in the 28 percent bracket pays an effective after-tax rate of 11.33 percent.

With a home equity loan at the same 12 percent, that person pays an effective after-tax rate of 8.64 percent.

Suppose you lead a fairly complicated financial life, and have interest payments that could conceivably fall into any one of several categories. How do you tell what is what?

That's most easily accomplished if you keep borrowed funds in an account separate from your other money. If you put what you borrow into, say, your regular checking account, you may well have trouble establishing that you are paying anything other than consumer interest.

Observes Brennan, "you can overcome this treatment by separating borrowed funds from personal savings, and then using the borrowed funds for purchases other than consumer items."