Habit - Forming: Borrowers Keep Piling On Debt
By Jane Kim

As Lenders' Tighter Standards Cut Off Some Avenues, People Tap Credit Cards, Equity Lines

The  credit crunch has made it harder for Americans to indulge in their love affair with debt. So what are they doing? Borrowing more. While tighter lending standards have cut off all but the most credit-worthy borrowers from auto loans and home loans, many people are turning to credit cards and tapping more of their home-equity lines of credit to dig themselves in deeper. And lenders, once eager to lend to those with even spotty credit records, are trying to rein in borrowing by cutting consumers' available credit lines.

Average balances on credit cards and home-equity lines of credit are growing rapidly, rising....Borrowing is climbing quickest in the regions where house prices plunged most sharply, making it tougher for people to extract money in cashout refinancings. Credit-card balances rose nearly 15% during the first quarter from a year earlier in California and Florida and more than 20% in Nevada-all states caught up in the housing bust, according to Equifax and Economy.com.

The rise in borrowing shows just how addicted the U.S. consumer has become to credit. Even as borrowers are cut off in one area, they promptly look for new sources. Workers have increasingly been raiding their 401(k) plans to take out loans over the past year, according to plan administrators.

Oh boy, where do I begin? When the housing bubble finally burst and credit tightened, I figured folks would realize that borrow & spend was not a sustainable economic model. It seemed inevitable that they would start cutting back. Of course I figured there would always be those ten-percenters out there who would prefer to go down in flames than adjust to a more frugal reality.

But it now appears the real ten-percenters are those doing just that -- cutting back and paying down debt. The rest have just ratcheted up their borrowing ways. Like crack addicts who've lost their usual pusher,  they've hit the street and found new sources of crack. Clearly, most are not ready to take the cure.

Deborah McNaughton, president of Legacy Financial Services Inc., a mortgage lender in Placentia, Calif., says several of her clients have recently borrowed more from their home-equity lines of credit and stashed the money in bank savings accounts. Theresa Leick of San Juan Capistrano, Calif.' a loan processor who works with Ms. McNaughton, pulled $21,000 from her available home-equity line of credit in February to park in a certificate of deposit.

"I'm fattening my reserves in case I have to go look for more work," says the 40-year-old Ms. Leick, who says she is concerned about losing her income because she works in the mortgage business. She says she would have preferred not to have tapped her home-equity line, "but if the bank takes away my comfort zone, that will make me lose sleep at night."

That's the "another-shot-of-the-hair-of-the-dog-that-bit-ya," cure for a hangover theory, and its kept many an alcoholic on the juice until their livers called the game over. 

Fearful that her bank might cut her off from borrowed money, her solution was to borrow money she currently doesn't need. Now she's got a bigger monthly payment on that unneeded cash, including interest. All because she wanted a "stash," just incase.

Now, if that's not the description of clinical addiction, I don't know what is.

Across the country, consumers are increasingly relying on credit cards to stay afloat. This week, the Fed reported consumers are boosting their use of credit cards. In February, Americans had $951.7 billion in total revolving debt... Credit counselors say they have started seeing more people turn to their credit cards to cover everyday items.

"Food, fuel and medicine-people are charging their day care, even their tithes to church, and any incidental items," says Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling in Silver Spring, Md.

This is particularly disturbing. I was raised by parents who ran their own business. They taught me that credit was a business tool, not an income source. If there was no way to make money on borrowed (rented) money, then it was stupid to borrow the money.  Even the family car was bought with money, not credit.  And a home mortgage was something to be paid off as part of the family's retirement planning.

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