Borrowing more, just to keep up

When mortgage rates were at historic lows a few years ago, Victoria Bolton and her husband refinanced their home in St. Paul, taking out cash to pay off $70,000 in credit card bills.

Her husband's woodworking business never brought in as much as expected, but they spent as though his next big job were around the corner. They relied on her nurse's salary, and when that ran out, they paid for groceries, their kids' college tuition, "everything you can think of" using credit cards, which Bolton, 55, said she used to consider "second income."

Bolton's habits help illustrate Americans' addiction to debt. Soaring tuition and health care costs, two years of interest rate increases and readily available credit all have left a growing number of Americans relying on debt to finance their standard of living.

Experts estimate almost half of Americans live paycheck to paycheck.

Credit card debt rose 31 percent between 2000 and 2005. Americans now owe more than $800 billion on credit cards, according to the Federal Reserve.

In addition, homeowners took more than $2 trillion in equity out of their properties between 2002 and 2005.

The growing debt load is affecting income classes differently.

Lower-income workers, who in recent years have been given more access to credit than in the past, are using it to make up for flat or declining pay. Some higher-wage earners -- who in the booming 1990s could cash out stock investments -- this decade began using their homes as piggy banks, sometimes refinancing three times as housing values grew. But now with home prices starting to sink nationally, some are finding themselves with increasing debt at a time of stagnant wages.

In Minnesota, the number of home foreclosures has more than doubled during the past year. And more Americans are stretching out car loans in yet another sign of buying more than they can afford. More than half of new car loans last year were for five years or longer, up from 22 percent in 2000.

Debt is not a problem for all Americans. Late payments on credit cards are generally at historic lows, and down from a year ago. Nearly 54 percent of credit card users pay the entire balance each month, a recent Federal Reserve survey showed. Net worth still is rising, albeit slightly, increasing 1.5 percent from 2001 to $93,100 in 2004, with most of the gains from appreciating home values. That compares with a 10.3 percent gain between 1998 and 2001.

A lifestyle supporter

Americans didn't always use credit for groceries, vacations and dinners out. Shira Boss, author of the book "Green With Envy: Why Keeping Up With the Joneses Is Keeping Us in Debt," said that shift started with baby boomers, who grew up believing they could have anything. While attitudes changed, the marketplace changed, too. Beginning in the 1980s, ads trained consumers to use credit cards as a "lifestyle supporter," Boss said.

Lenders, bent on growing, lowered their standards of creditworthiness. Consumers who once were denied credit had multiple offers to choose from and were unaccustomed to managing it.

One in three households surveyed by the Center for Responsible Lending used credit cards to pay the mortgage, keep the lights on or buy food in four of the past 12 months.

Credit counselor Linda Humburg said many clients turn to credit cards to mask financial problems and make ends meet until an illness, job loss or divorce derails their debt repayment. Others are in debt because their eyes are bigger than their bank accounts. She estimates that 95 percent of clients coming to Family Means in Stillwater, where she's a counseling manager, don't know how much it costs to live. "They've never sat down and added it up."

Changing piggy banks

Jean Chatzky, a financial author and money coach for "The Oprah Winfrey Show," thinks paper wealth is partly to blame for high debt loads. "First the markets were raging and our portfolios were getting fatter and fatter and fatter," she said. In 2004, fewer individuals owned stock than they did in 2001, the year the tech bubble burst. With the stock market down, "The housing market took off," Chatzky said.

As did the borrowing. Between 2002 and 2005, Americans borrowed $1.4 trillion in the form of home equity loans and lines of credit, according to SMR Research in New Jersey. During the same period, according to Freddie Mac, they took out another $645 billion using cash-out refinances, when borrowers take out a bigger mortgage than the one they just paid off and walk away with cash to spend.

"While they were at the table, they figured, 'Why not take a little cash out?' " said Amy Crews Cutts, Freddie Mac's deputy economist.

"Many people we see have done the home equity loan, not once, not twice, but three times in the last few years to roll [credit card] debt," Humburg said.

Falling wages

At the same time, incomes were stagnating or even falling. Between 2000 and 2005, inflation-adjusted hourly wages fell for low- and middle-income Minnesotans. Higher-income workers saw a trickle of wage growth -- 0.1 percent annually -- but they've been pinched as prices for health insurance, fuel, housing and college have risen far faster than their income.

More Minnesotans are seeking help. Lutheran Social Service Financial Counseling's typical client in fiscal 2004-05 was a 43-year-old woman with $12,500 in credit card debt. A year later, the service is seeing more clients with 20 percent more debt.

Chatzky, who helped a family on Oprah's "Debt Diet," aimed at teaching people to live within their means, said people stop her to let her know they're cutting back. Last she heard, 1 million Americans are on the Debt Diet program.

Boss the author thinks attitudes about debt will begin to change as Generations X and Y see their parents working longer because of their measly nest eggs. "Once the younger generation sees there's no such thing as retirement, that will be a wake-up call," she said.

As for Victoria Bolton, she saved religiously and chopped her spending to rescue her home from foreclosure. Meanwhile, her husband was shopping for a sailboat. She kept the house but not the husband.

Kara McGuire • 612-673-7293 • kara@startribune.com