Consumer Debt Rising Steeply in Southland : Finance: Tempting credit offers, economic optimism spur borrowing. But experts say trend is worrisome.

Scarcely out of the recession, Southern Californians are plunging back into debt. And this time, many are jumping off the deep end.

Caroline Livingston, 31, of Palmdale couldn’t resist the Visa card offer--a $2,000 limit and an initial interest rate of 6%. But now she’s $300 over the limit and that “teaser” rate just tripled. Struggling to pay her mortgage, a month ago she got a new Discover card with a $3,000 limit.

Louis Delao, 48, and his wife racked up $25,000 in credit card bills. So last month they got a $35,000 equity loan. But the Delaos have no equity in their Moreno Valley house, the new loan has a high interest rate, and they didn’t pay off all their credit card debts.

Rebecca Schoenkopf, 22 and fresh out of college, charged the down payment on her new GEO Metro and buys groceries on credit. The Costa Mesa graphics artist earns $22,000 a year. Unfortunately, next month she also must start paying on her student loan debt of $8,500.

These are among the thousands of Southern Californians who have boosted their balances on everything from credit cards to personal loans to equity lines, pushing consumer debt to alarming new levels this year.

Banks and other financial institutions, facing intense competition, increasingly have flooded mailboxes with all kinds of credit offers, enticing many to take on more debt and bringing newcomers into the fold.

The offers include credit cards that give points toward U.S. savings bonds, pre-approved credit from auto makers to lease new vehicles, even equity loans for homeowners who owe more on their properties than they are worth.

The average credit card revolving balance for a Southern Californian was $2,572 as of Sept. 30--up 20% from the year before, according to data generated for The Times by Claritas Inc., a market research firm in Arlington, Va.

Claritas’ surveys--used by banks and other financial institutions--show that 29% of households in the five-county region owed creditors $10,000 or more this year, excluding mortgages. That compared with 24% last year.

“People have become increasingly dependent on debt for purchasing,” said Robert Pollin, a UC Riverside economist who has researched consumer debt. “It’s a very serious problem.”

Experts worry that if too many households get in over their heads, it could have powerful economic effects.

Economists Worried

For one thing, it could dampen the recovery if consumers suddenly curtail their spending.

Tony Cherbak, a partner at Deloitte & Touche in Costa Mesa, believes that could happen as soon as this holiday shopping season.

After polling Southland shoppers in November for his accounting firm’s annual survey, Cherbak said it is obvious that “consumers are starting to feel the squeeze. At some point, they will have to pull back.”

The longer-run worry, though, is what will happen if the economy slumps and there is another epidemic of job losses. In that case, the bulking consumer debt will push many more people over the edge, resulting in a greater volume of defaults and bankruptcies, and ultimately prolonging the economic pain.

“In the next downturn, Californians are going to be much more vulnerable” because they began the recovery with a heavy debt load, said Mark Zandi, an economist at Regional Financial Associates, a research firm in West Chester, Pa.

Experts peg part of the recent debt run-up to improved consumer confidence. Relieved earlier this year that the recession appeared to be over, Southern Californians began plopping down the plastic or taking out second mortgages to make long-delayed purchases and repairs. But the economic recovery has been shaky at best and now that confidence is flagging.

Meanwhile, others whose jobs and incomes were cut during the recession are incurring debt to maintain their living standards. And still others have never stopped buying on credit, in good times or bad.

California’s credit binge has been lagging a similar national trend by about a year, just as the state’s recovery has trailed the country’s economic turnaround.

During the recession, the region actually started to dig out of its debt. From 1991 to 1994, foreclosures, bankruptcies and cutbacks in spending caused the overall consumer debt burden in the state to drop.

But in the last 12 months, personal debts have risen sharply. As the recession ends and more people pile on more debt, many economists worry that unlike the booming ‘80s, this time we won’t have growing incomes, better jobs and ever-escalating home equity to support us if we get too far into hock.

“Consumers in California are more fragile than anywhere else in the country,” Zandi said. “They’re much more susceptible to rising interest rates and other kinds of economic shocks.”

Signs of Trouble

Already, households in the region are under considerable strain.

Personal bankruptcies, an indicator of credit troubles, have been rising nationwide in the last year. In the Southland, they rose slightly in the third quarter compared to a year ago, and remain 50% ahead of the caseload in the late 1980s.

Delinquency rates on credit cards nationwide also have risen sharply in the last year. A separate Federal Reserve Board report on California banks shows that such delinquencies bottomed out in late 1994, but they have climbed in the first two quarters of this year.

Home equity lines past due in California were up in the first half of this year, compared to the same period a year ago, and were triple the rate of 1991, reports from large banks show.

Auto repossessions in the state have been increasing steadily this year. By June, the rate was double that of a year earlier, according to the American Bankers Assn.

Through October, 22,020 debt-ridden people visited Consumer Credit Counseling Service in Los Angeles County this year. That’s up 21% from the same period in 1994 and about the same as the peak in 1993. In Orange County, the nonprofit service counseled 16% more individuals and families than a year ago.

James Frannea, head of Consumer Credit Counseling in Orange County, said many of his new clients confessed that they got into trouble because they thought the recession was behind them.

“For some reason, a lot of people thought we were back and strong again,” he said.

Maureen Tsu, a certified financial planner in San Juan Capistrano, fears that many have become blase about debt and spending. “Our society makes it so easy to get credit and spend,” she said. “People think, ‘I want this and I should get it.’ ”

To be sure, some savvy consumers are taking advantage of the low interest rate to consolidate their loans, or are using credit cards for convenience or to earn airline miles, paying off their balances every month.

Take David Hemstreet, 55, of Pasadena. He had never taken out a home equity loan before--that is, until last summer when this offer came in the mail: an introductory interest rate of 7%, no appraisal fees.

Hemstreet, who is a financial planner, is using the loan partly to pave his driveway and to pay off car loans. By tapping into his equity line, Hemstreet knows he can get tax deductions.

Borrowers such as Hemstreet are not considered risky. But lenders have expanded into the higher-risk market, extending credit to consumers who are younger, less financially established or have a nick or two on their credit reports.

“Lenders are looking for new markets, new customers, and many of them are going to the credit-impaired market,” said Fritz Elmendorf, spokesman for the Consumer Bankers Assn., which has 700 member institutions. “They’re finding a way to say yes to more applications.”

For banks, credit cards are extremely profitable. They can borrow money at a rate of 5.25% while charging cardholders much more in interest. The average annual interest rate for credit cards has climbed this year to 18% from 16.5% two years ago, according to the Bankcard Holders of America, a consumer group in Salem, Va.

Just how easy is it to get credit these days?

Easy Credit Beckons

Ask Richard Gutierrez, a 22-year-old factory worker in Orange County. He and his wife, who is a receptionist, have modest incomes and live in her parents’ house in Santa Ana. But Gutierrez said they are constantly offered pre-approved credit cards with increasingly higher limits.

Earlier this year, he signed up for a GM card with a $3,000 limit. He said he does not know what the balance is on that card, or for that matter any of the other dozen-plus credit cards in his wallet. Gutierrez said he is prompt in making monthly payments, but it is usually not much more than the minimum due.

“I’m trying to stay away from it,” Gutierrez said. “But it’s hard. It’s a lot of temptation.”

Although the debt problem crosses all racial and age barriers, no group is more vulnerable than those with moderate incomes, such as the Gutierrezes. And these are the folks whose debt has increased the most.

For example, households with incomes between $30,000 and $35,000 carried an average total debt load, including mortgages, of $43,800 this year--almost a third more than just a year earlier, according to Claritas.

“The closer you are to poverty, the more likely you are to be present-oriented,” said Richard Linck, a Covina loan broker who works with risky borrowers. Linck said many of his clients never had control of their spending, so they are now rolling over their debts and doing what they can to avoid bankruptcy.

“They’re in a treadmill and they can’t keep up,” Linck said.

The run-up in debt and the easing of credit standards have prompted warnings from private economists as well as regulators, but analysts do not expect a tightening of credit in Southern California anytime soon.

Lenders continue to develop more targeted mail offers and formulate sophisticated models to reach the higher-risk borrowers. Although the recession forced some people to be more frugal, many still feel they are entitled to all the pleasures of the California lifestyle.

“It’s to keep up with the Joneses,” said Jan Hobbs, a certified financial planner in Tustin. What people don’t realize, she adds, is that “they would have a better standard of living if they weren’t paying 18% interest on that credit card.”

Adrian Sanchez, an economist at First Interstate Bank in Los Angeles, said Southern California’s credit crunch is not as bad as it is in other parts of the nation. “Our recovery is fairly new,” he said, “and there’s some room for borrowing and expansion.”

But he concedes that lenders are making too many easy loans. “You may see a rising number of people who default.”

Juggling Debts

Zandi estimates that nearly a fifth of California’s after-tax personal income goes toward servicing mortgages and other consumer debts, much higher than the rest of the country. And this burden is growing.

Economists say the debt-service ratio is an important measure of people’s ability to repay their loans. Although there isn’t an exact danger point, California’s debt burden is higher than the nation’s peak in late 1989.

Moreover, debt burdens would be even higher if it were not for the low interest rates and loosened loan terms, such as longer maturities and lower minimum monthly payments.

Ruth Susswein, executive director of Bankcard Holders of America, said major credit card issuers have lowered minimum monthly payments to 2% of the principal, down from 3% nearly two years ago.

“That’s ridiculously low,” she said. If that is all cardholders pay, she added, “you could put yourself into debt for decades.”

Jason Lehto, 22, is one of countless people who have played the credit-balance transfer game. In recent months, he switched debts of $3,000 into two lower-rate cards. But he didn’t get rid of the old cards, and now he has a total of seven with a limit of nearly $20,000.

Now, Lehto’s total credit card balance is about $3,500--slightly less than a year ago. But two years ago, the Marine Corps corporal in El Toro was debt-free.

A recent Commerce Department report showed that nationally, individuals’ median net worth generally stagnated in the early 1990s, with younger households losing ground.

Income Growth Seen

It was worse for California households, especially in the southern half. TRW REDI estimates that the average resale price of houses--most individuals’ main asset--fell 25% in the last five years. And personal incomes did not budge from 1990 to 1994 after inflation, according to Jack Kyser, economist at the Los Angeles Development Corp.

Kyser expects incomes to grow slightly this year, and he said the regional economy is stronger and less vulnerable today than five years ago. Still, Kyser bites his lips when he looks at the rising debt figures. Real estate values are not likely to climb much anytime soon, he warned, and economic stability is not a sure thing.

“You have to be very cautious because things can turn almost on a dime,” he said. “You have to think, what happens if I lose my job.”

Certainly Greg and Sharon Lamb, a Lancaster couple in their mid-30s, never foresaw what would be befall them. In early 1993, the Lambs, who have two children, took out a second mortgage of $15,000 to put in a patio, repair the engine in their aging Subaru and consolidate some bills.

The Lambs had little equity in their house, but they had no trouble qualifying for the loan. “We were both working and good candidates for all kinds of money,” Sharon Lamb said, noting that at first they could handle the $467 added to their monthly mortgage of $1,157.

But then came the Northridge earthquake, which prompted Sharon Lamb’s employer to flee the state, erasing her $30,000 salary. Her husband’s $40,000-a-year job as a computer programmer was safe, but his employer did not give out raises for two years and also cut back on paying carpool leaders, eliminating another several hundred dollars a month in the Lambs’ income. To boot, in the summer the Lambs lost their $150-a-month boarder.

Last month, after maxing out their credit card and dipping into their children’s savings--putting IOUs in their piggy banks instead--the Lambs walked into Consumer Credit Counseling Service.

“Without the second mortgage, we’d probably be OK,” Sharon Lamb said. “It wasn’t like we did anything crazy. It was great one minute, and boom the next.”

Times librarian Sheila Kern assisted in the research for this story.

* CASE STUDIES: Three families tell how they got out of debt. D1

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

On the Brink

* TODAY: A new wave of consumer debt buildup threatens the Southern California landscape.

* MONDAY: Mortgage lenders push easier loans to a new class of high-risk homeowners.

* TUESDAY: Young adults struggle to cope with their escalating debt burdens.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Increasing Signs of Strain

Rising debt burdens are likely to push more households over the edge. These barometers show an increasing number of Southern Californians already are being stretched to the limit.

More Are Seeking Help

Number of Clients at Consumer Credit Counseling:

1995*

Orange County: Up 16% from same period in 1994

Los Angeles County: Up 21% from same period in ’94

* through Oct. 31

****

Where To Go For Help

Consumer Credit Counseling Service

Nationwide nonprofit organization offers free or low-cost financial counseling. Call (800) 388-2227 for nearest office.

Bankcard Holders of America

Nonprofit organization provides consumer information about credit cards. For $15, you can also obtain a personalized report to help formulate an effective plan for paying off debts. Write to BHA’s Debt Zapper, 524 Branch Drive, Salem, VA 24153.

Debtors Anonymous

A group in which people share their experience and to solve their common problem of compulsively going to debt. For a list of meeting in your area, write to Debtors Anonymous, P.O. Box 400, Grand Central Station, New York, NY 10163.

****

More Autos Repossessed

Californians are losing their vehicles in increasing numbers. Repossessions per 10,000 loans:

*--*

California U.S. 1990 0.82 1.07 June, 1995 1.35 0.85

*--*

Note: 1990-93 figures based on monthly averages; includes only direct loans.

****

More Are Late on Equity Loans . . .

Home equity lines past due have edged upward this year to triple the levels of 1991. Accounts past due 30 days or more (in percent):

1991

1 qtr.: 0.51%

1995

2 qtr.: 1.38%

Note: Based on call reports for large banks in California

****

. . . And Credit Cards

Percent of accounts past due 30 days or more.

1993

1 qtr.: 3.98%

1995

2 qtr.: 3.58%

Note: U.S. figures are used because credit card activity is nationwide. Excludes department store and oil company cards

****

Debt-Service Burden Grows . . .

Californians devote a greater percentage of their income to service their mortgages and installment loans. This ratio, a measure of people’s ability to repay their debts, had declined during the recession but is on the rise again.

*--*

California U.S. 1988 20.2 17.4 1995* 19 16.6

*--*

* 2nd qtr. figure

Note: Latest U.S. figure is nearly one percentage point higher than 35-year average.

****

. . . But Incomes Stay Flat

Though Southern Californians took on more debt in the mid- and late ‘80s, they had the cushion of rising incomes and housing prices. But in recent years, real incomes in the region have been stagnant. Personal income growth, adjusted for inflation:

1984: 10.7%

1991: -1.8%

1994: 1.5%

Note: Figures for five-county area

****

How Much Is Too Much?

While there is no magic formula for how much debt you can comfortably handle, experts say you are more likely to be overextended if you:

Don’t know the total of your debts

Make minimum monthly payments on credit cards

Argue often about finances with your spouse or family

Use cash advances to pay other credit cards and bills

Use credit cards to meet basic expenses such as groceries

Pay out more than 36% of your gross income for debts

Don’t have cash reserves to cover three to six months of living expenses

Are at or near the limit on your credit cards

Use an increasing percentage of your monthly income to pay off debts

Sources: Administrative Office of the U.S. Courts; Consumer Credit Counseling; Personal Financial Advisors; Innovative Financial Planning Associates; Economic Development Corp. of Los Angeles; Regional Financial Associates; Federal Reserve Board; Federal Reserve Bank of San Francisco; American Bankers Assn.

Researched by DON LEE / Los Angeles Times

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Rising Tide of Debt (Orange County Edition, A52)

Consumer debt in Southern California has burgeoned in the last year, prompting warnings from analysts who see disaster ahead. An overview of Southern California debt levels:

Bill of Debts

Average outstanding balances for Southern California:

*--*

Other Credit 2nd mortgages Personal loans installment loans card 1992 $23,573 $12,840 8,684 8,684 1994 $23,086 $12,514 7,254 $2,180 1995* 3 qtr $25,212 $15,068 $10,305 $2,572

*--*

* Quarterly data reflect average for 12 months ended that quarter

Note: Figures are for user household. They exclude outstanding balances on department store accounts, which make up 20% of all credit card debt.

****

Tracking Debtors

More Southern Californians are taking on heavier debt loads. Nearly a third of residents now owe $10,000 or more. Percent of population by debt levels, excluding mortgages:

*--*

1992 1995* 0 to $2,500 52% 53% $2,500 to $4,999 10% 7% $5,000 to $9,999 13% 11% $10,000 or more 25% 29%

*--*

* through Sept. 30

****

Borrowing Against Income

Though consumers nationwide have taken on more debt, those in California are far more extended, and the load is getting heavier for those on the bottom. Average household debt, including mortgages, by income distribution:

United States

*--*

Percentage change 1995 Income range from 1990 to 1995 debt load Less than $15,000 44% $6,726 $15,000 to $19,999 52% $10,330 $20,000 to $24,999 39% $17,993 $25,000 to $29,999 25% $24,999 $30,000 to $34,999 37% $35,253 $35,000 to $49,999 6% $41,753 $50,000 to $74,999 91% $78,883 $75,000 to $99,999 13% $116,647 $100,000 to $124,999 26% $154,550 More than $125,000 29% $192,017

*--*

****

California

*--*

Percentage change 1995 Income range from 1990 to 1995 debt load Less than $15,000 45% $7,391 $15,000 to $19,999 53% $11,478 $20,000 to $24,999 41% $20,217 $25,000 to $29,999 25% $28,089 $30,000 to $34,999 34% $39,170 $35,000 to $49,999 6% $47,992 $50,000 to $74,999 87% $89,640 $75,000 to $99,999 17% $129,464 $100,000 to $124,999 30% $173,652 More than $125,000 29% $211,008

*--*

****

Southern California

*--*

Percentage change 1995 Income range from 1990 to 1995 debt load Less than $15,000 80% $8,392 $15,000 to $19,999 76% $12,005 $20,000 to $24,999 38% $20,087 $25,000 to $29,999 10% $25,099 $30,000 to $34,999 53% $43,794 $35,000 to $49,999 8% $50,003 $50,000 to $74,999 20% $93,679 $75,000 to $99,999 17% $128,809 $100,000 to $124,999 13% $167,774 More than $125,000 18% $196,881

*--*

Note: 1995 figure is 12-month average ending June 1995.