Borrowing to Save: a Common Contradiction


The globe-trotting electronics consultant. The health insurance worker. The computer engineer. The union official. The teacher. The nurse. The Avon lady.

They're all saving for the future. They're planning for their retirement or their kids' college education or to buy a house. They've salted money away into stocks or mutual funds or 401(k) plans.

The trouble is, they're putting it on their credit cards--and most of them don't even realize it.

Much has been written about credit-card debt swirling out of control, but the blame so far has been leveled mainly on self-indulgent baby boomers or low-income families using credit to survive.

Now economists and financial specialists have identified a more puzzling trend. Increasingly, it's the conscientious savers and avid investors who are carrying hefty balances on their plastic.

"It may very well be that they're borrowing to save," said Nate Franke, head of retail services at Deloitte & Touche in Costa Mesa.

Indeed, in a recent study on credit card debt, MasterCard found that more people are using debt to purchase financial assets such as stocks and bonds.

Generally, according to the study, it's a circuitous route. A consumer uses a credit card to pay for a new sofa, or delays paying off old debt, for instance, so he can maximize his contributions to a savings plan.

That finding was reinforced by a recent Times Orange County Poll. More than one-third of those who owned stocks or stock-related investments also said they didn't pay off their credit card debt every month. The poll of 600 Orange County adults was conducted March 8 to 11 by Mark Baldassare and Associates.

Whether that's a safe bet depends on whom you ask. MasterCard argues that going into debt to help finance savings is far superior to using credit cards only for goods and services with no lasting value.

"Most people try to balance living well now with saving for the future," said Lawrence Chimerine, chief economist at the Economic Strategy Institute and a consultant for MasterCard. "As long as [the debt] is matched by an increase in the value of assets, rather than funneling all of it into consumption, I think it's healthy."

But what if it isn't matched?

Investors might be getting their first taste of that. The stock market, which posted phenomenal gains in the past few years, has seesawed in recent weeks. When the Dow Jones industrial index was up 26%, as it was last year, the average 17% interest rate on credit card debt seemed more palatable. But now there's concern that a bear market might be at hand.

And that's exactly what some financial experts have been warning about all along.

They believe the surging stock market led some people to fall into a dangerous trap of getting more heavily in debt because they felt more flush at the moment--even if their investment funds were tied up in long-term retirement plans.

These advisors point out that the stock market historically averages an 11% return. By paying finance charges on their debt, they say, investors are effectively wiping out at least part of their investment income.

Often, though, that advice fell on deaf ears.

Larry Beltramo, a financial planner at Regency Securities in Irvine, said that some people became so enamored by the stock market in the past couple of years that they wanted to plunge in despite large existing debt loads. Some even wanted to add to their debt to raise cash to invest in stocks. He told them to come back and see him when they're debt-free.

"Some people get mad. They say, 'What do you mean? Everyone else is investing.' They're not looking at the big picture."

Maintaining a Lifestyle

For many people, a certain amount of credit card debt, weighed against their savings, has simply become an acceptable risk.

Take Julie Harkins, a 52-year-old middle school teacher in Irvine, and her husband, Chuck, a retired aerospace engineer, who manage to sock away about $12,000 a year into their investments. They have IRA accounts, a mutual fund and stock, and she expects to have an annual income of about $30,000 when she retires in eight years.

"We do not want to lessen our lifestyle," Harkins said. "We're not going to be rich, but we are hoping to live comfortably. I don't want to be retired and live like some people, who can't take a trip or anything."

She doesn't see her $20,000 in debt standing in the way of that. She reasons that the interest rates on her credit cards and other debt, minus the return on her investments, amount to a low-interest loan to pay for car repairs "and little stuff like that." That's better than she could do with a bank loan, she said.

Harkins is by no means out of the ordinary. In the Times Orange County Poll, 40% of respondents said they pay a finance charge on their credit card bills each month, and nearly half of them owed $2,000 or more.

Even among those earning more than $100,000 a year, 29% carried outstanding balances on their cards.

That's the case with Michael King, 55, an electronics consultant who trouble-shoots for major international corporations. His wife, Rosemarie, 50, co-owns a delicatessen. With an annual income exceeding $200,000, they own a 4,200-square-foot house in Costa Mesa, horses and vintage Italian sports cars. Last year they went on a six-week European cruise.

The Kings have an impressive portfolio of stocks, bonds and real estate, which they manage themselves.

But they still owe about $20,000 on their credit cards, accumulated from their travels, eating out and gift purchases.

For a couple in the King's position, that's hardly a crushing burden. After all, they earned about 26% on their investments last year, and that money is safely tucked away in a Keogh retirement plan until Michael turns 59 1/2. Still, Rosemarie acknowledged, it's more debt than she's comfortable with.

So why don't they get rid of it?

"I find that we just don't have enough self-control to pay that off," she explained. In fact, she believes that carrying the debt is a way of forcing some discipline on herself.

"I have more than once looked at something, had my hand on the card, then said, 'No, I really don't need this. I shouldn't add to the load.' "

Calculated Risk

Of course, what these individuals are doing is not quite the same as the high-rolling investor who buys stock on margin--that is, with borrowed money--in a calculated risk intended to produce a big payoff. And financial experts are quick to point out that savings and debt are complicated issues, and individuals' finances must be judged on their own terms.

What's more, some economists contend that the alarms being sounded over high levels of credit card debt and record delinquencies are misplaced. They attribute ballooning balances to the growing ease of use of credit cards, and incentive programs such as those that offer frequent flier miles. For the vast majority of people, they say, credit card debt is manageable.

"There are several sensible reasons to take on some debt," said Michael J. Boskin, former chairman of the President's Council of Economic Advisers and now a Stanford University economics professor.

"I don't think we should go back to Polonius' advice, 'Neither a borrower nor a lender be.' "

Still, many are distressed by Americans' propensity toward debt, and believe it poses a threat to the nation's financial well-being. True, the savings rate is up, they say. The problem is, people still haven't cut back on their spending, leaving many just a step away from cashing in their cherished savings to pay off debt.

"We see people from all walks of life, all income levels. We see doctors, lawyers, teachers," said James Frannea, president of Consumer Credit Counseling Service of Orange County, a nonprofit organization that advises debtors.

"'People always tend to think they can beat the system," Frannea said. "They've established a lifestyle in excess of their earnings. The only way to maintain that lifestyle is to constantly add to their debt."

Eric Williams, 34, a computer systems engineer who lives in Los Alamitos, knows that story well. "I am one of those impulsive buyers," he said. "If I see something, I've just got to have it."

That included stereo equipment, skis, cameras, even an airplane. "It didn't take long to wrack up $10,000 to $12,000 in credit card debt," despite an annual salary of about $45,000. At one point, Williams even borrowed against his 401(k) savings.

"Then reality set in."

The plane is long gone, and Williams has whittled his debt down to $500. He hopes to buy a house in a few years--a goal he now realizes he could have achieved much sooner if not for his past credit card sprees.

But for many Americans who have been downsized, reorganized and retrenched throughout much of the decade, credit cards have become a crutch that has allowed them to get through the rough patches. They're part of an intricate juggling act that weighs peoples' hopes and dreams for the future against the pressing demands of daily life--the modern version of borrowing from Peter to pay Paul.

'A Rocky Road'

"It's been a rocky road," said Kathy Kifaya of Fountain Valley. "We're just now getting ourselves out of the hole."

At first glance, Kifaya, who works as a director at a nonprofit organization, and her husband, Sam, a computer systems engineer, would seem to be living the American dream.

They both have advanced degrees, together earn more than $75,000 a year, and invest in a mutual fund-backed savings plan that they hope will pay for their two teenage sons' college education. They own some stocks, which have averaged a 15% to 20% annual return the past couple of years. They have a house, two cars, pay their bills, "and have a little left over," Kifaya said.

So what's the problem?

The Kifayas' debt swelled when they experienced some unexpected financial turmoil and they used their credit cards to cover car repairs and other necessities. Lately they've been devoting 25% of their monthly income to paying off the debt and have just a small balance left.

"It took us a good part of five or six years to build that debt," Kathy Kifaya said. "Debt doesn't just build up overnight, and it will not go away overnight."

That's the reality faced by Amy O'Bryant, 33, a Santa Ana nurse, and her husband, Daniel, a manager at a software retail outlet.

Together they earn about $30,000 to $40,000 annually, and "live paycheck to paycheck," O'Bryant said. "Our bills aren't caught up. We're always a month behind. It just seems like the cost of living doesn't measure up with what we make."

They've stopped giving gifts to each other on holidays, and can't take the vacation they've longed for. "It depresses the hell out of my husband," O'Bryant said.

The pair have about $1,000 in credit card debt, and pay another $100 a month for a computer they bought on credit--a purchase O'Bryant concedes was "really stupid."

She started putting money into a 401(k) two years ago, and thought about borrowing against it to help pay bills. But now she's glad she didn't. "It's a good thing it wasn't that easy," she said.

Then there's Chris and Greg Raymond, who might be the typical middle-class couple. They have two small children, a house in suburban Westminster, two cars, and combined annual income of $45,000 through his job as a water service specialist at the Department of Water and Power and her Tupperware sales.

They invest in a retirement plan through Greg's work, and teach the children to save the money they get for doing household chores. Chris' earnings help cover the trips to Disneyland and Chuck E. Cheese, and soccer for the kids.

"We're just scooting by," said Chris.

Between their credit cards and a credit union loan, the Raymonds owe about $9,000 after buying items for their house and Christmas gifts. They intend to pay it off, "but there's always something that comes up," said Chris.

"Right now we're in the middle of tax season. We've got a property tax bill due. We need new tires for the cars. Little League is $65 just to sign them up."

Short-Term Thinking

In a sign of just how uncomfortable people are about owing money, in the Times Orange County Poll, one-third of those surveyed said that if they won $50,000 in the lottery they'd use it to pay off debt--far more than any other response.

Still, despite professing to be uneasy with their credit card debt, many people remain stubbornly averse to paying it all off. A big reason for that, some experts say, is the lure of stock-related investments.

A case in point is Tom Boyle, 50, a divorced Tustin resident who works at a health-care company enrolling seniors in a Medicare plan. About 10 months ago he lost his condominium to foreclosure after his former employer cut his commissions and he couldn't keep up with his mortgage payments. He has $15,000 in credit card debt, mostly a result of cash advances that helped tide him through tough times.

"It was just a matter of stretching things out," he said. "Maybe the mortgage was due and I would need an extra $200." Now Boyle's car needs work, and he already owes more than it's worth. So he's considering bankruptcy.

But when Boyle recently came into a small inheritance, he used the money to pay off about 40% of his debt--then stopped.

"I decided, 'No, I've done enough,"' he said. He took the rest of the money and invested it in a mutual fund.

Many experts believe that people operating under that kind of thinking are simply fooling themselves.

It's a tough message coming from the financial advisors who for years have been harping on consumers to stop living only for today and start saving for the future.

Jerry Slusiewicz, a senior investment specialist at UBOC Investment Services in Newport Beach, doesn't want to discourage the upswing in savings. The point is, he said, "you should be investing with money you have, not borrowing to invest.'

Someone who puts money into stocks or mutual funds or other investments while still carrying a big credit card balance might think he's acting responsibly, Slusiewicz said.

"But what he's really doing is living in the short term."


Credit Crunch

Credit cards continue to be a problem for Orange County residents, even those with high incomes and stock investments. Among the four in 10 who carry credit card balances, about half owe $2,000 or more.

* How many credit cards do you currently have?

None: 10%

1-2: 35%

3-4: 25%

5-7: 15%

8 or more: 15%


Credit card holders were asked:

* Are your credit card bills currently paid in full each month, or do you have outstanding balances that cause you to pay a finance charge?


Finance Don't Paid charge know Total 59% 40% 1% Household income Less than $50,000 50% 49% 1% $50-000-$99,999 56% 43% 1% $100,000 and more 70% 29% 1% Own stocks 66% 34% -



Those who pay a finance charge were asked:

* About how much of a balance do you have on your credit cards--that is, an outstanding amount that requires you to pay a finance charge?

Less than $100: 2%

$100-$500: 21%

$501-$999: 16%

$1,000-$1,999: 13%

$2,000 or more: 47%

Don't know: 1%


Whither Lotto Winnings

Aside from credit card debt, mortgage, car and college loans, about one adult in three is making payments on some kind of personal loan. About one-third say they would pay off the loan if they won $50,000 in the lottery.

* What is the first thing you would you do with the money if you won $50,000 in the lottery?

Pay off loans/debts: 32%

Invest in stock market: 19%

Deposit in savings: 13%

Buy a house: 11%

Take a vacation: 9%

Buy things I've wanted: 6%

Other: 7%

Don't know: 3%

Source: Times Orange County Poll


How the Poll Was Conducted

The Times Orange County Poll was conducted by Mark Baldassare & Associates. The random telephone survey of 600 adult Orange County residents was conducted March 8-11 on weekend days and weekday nights. The results were statistically weighted to reflect the geographic distribution of county households. The margin of error for the total sample is plus or minus 4 percentage points. For subgroups, such as respondents with investments in the stock market, the margin of error is larger. While all respondents were guaranteed anonymity, some agreed to be re-interviewed for news stories.

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