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From Foreclosure Signs to Auto Repo Lots
Easy Credit Gives Way to High Consumer Debt and Defaults

By David Cho and Nancy Trejos
Washington Post Staff Writers
Monday, February 18, 2008

Reina Bolanos got a loan for her used Honda Odyssey in 2006 on what appeared to be favorable terms: $16,000 without a down payment. Though the 8 percent rate was high, Bank of America offered to spread the loan over six years to keep the monthly payments down.

But the secretary from Silver Spring found that raising her young children cost more than she had expected, and she now worries about losing the car after missing her last two payments.

A growing number of Americans are buckling under the weight of debt as the troubles that started among homeowners with subprime mortgages last year spread to other consumers who rely on credit. Auto loan borrowers are having an especially hard time. The number of people more than 60 days late on their car payments has spiked to a 10-year high, according to Fitch Ratings.

Similar problems are brewing for credit card holders. Card balances written off as uncollectible by banks have jumped 24 percent, and late payments are up 16 percent from a year ago.

Like the mortgage market, consumer credit boomed in recent years as lending standards loosened. Unorthodox auto loans lured consumers to buy cars they otherwise couldn't afford. Credit cards teased holders with introductory rates that soared after a few months. Now, more people are struggling to keep up with their bills under the strain of growing job losses and an economic downturn.

Bolanos, 27, has been using her credit card to pay utility bills and buy groceries, even though the card is nearly maxed out. She's racked up $5,000 in credit card debt. With monthly car payments of $400, $1,335 in rent for her two-bedroom apartment and sizable day-care bills, she's overwhelmed. She and her husband, a construction worker, earn a combined $50,000.

"It's just so stressful," Bolanos said. "To be young and to have a family going through this, it's hard."

Consumers borrow more money today than at any point in history, and they are increasingly using credit to pay for nearly everything, from cars to groceries to electricity. Consumer debt reached an all-time high of $2.55 trillion in December, nearly double from a decade ago, according to the Federal Reserve. Some economists say Americans are simply paying the price of their addiction to debt and are now more vulnerable than ever to credit downturns.

Behind the rising defaults is a tale of two Americas. Those with good credit will almost certainly see lower rates on cars and credit cards as the Fed continues to cut rates this year. But those with bad credit are facing rising rates and being forced to put more money down on cars. Some may not be able to get a credit card or auto loan as banks, spooked by the mortgage mess, have been reassessing the risk of making loans.

"It's going to be much more difficult for those people who are already in credit distress than it is for those of us who are fortunate and have full-time jobs," said Tony Cherin, a finance professor at San Diego State University.

But others worry that even those with good credit will share in the pain. The financial woes that started among homeowners with questionable credit histories -- the "subprime" borrower -- have sparked a downturn in the housing market.

"It's not only people who are stuck with the subprime mortgages. It's your average American," said Todd Cook, president of Debt.com, which refers financially stressed people to firms that can help them. "It started with mortgages, but it's spilling over. If it's not their homes, it's their credit cards. If it's not their credit cards, it's their autos."

Car loan holders are not only missing their payments. They're increasingly losing their vehicles. The number of repossessions soared last year by 10 percent and is expected to rise by the same amount this year, said Thomas Webb, chief economist for Manheim, a global car auction firm.

Repo lots are getting full, he said, adding that the troubles mean "banks will be looking for more money down, which means most consumers will probably have to buy a lower-priced vehicle."

That would have consequences for the auto industry. Lehman Brothers said in December that it expected U.S. auto sales to drop this year because many consumers will find it tougher to get auto loans. The bank said in its report that General Motors, Ford and Chrysler will feel the worst of the downturn because customers with questionable credit account for a higher percentage of their sales than those of European and Asian brands.

People who opted for nontraditional auto loans to get into more expensive cars are having the most trouble keeping up with their payments. A decade ago, it was rare for loans to last longer than five years; now, it is common for them to go for seven or eight years. While these products lower monthly payments, they also dramatically increase the amount of interest a borrower pays and raise the chance they will default.

Delinquencies among borrowers with poor credit, who favor this loan type, exceeded 4 percent last month -- the first time since 1997. For borrowers with good credit, who tend to use traditional loans, the rate hit 0.8 percent, also the highest in a decade.

Credit card companies are also seeing a rise in delinquencies, and while they are not near historically high levels, they are following a bad trend, industry analysts said.

Leana Divine, 28, said she has about $36,000 in debt on five credit cards. She makes $47,250 a year as an associate manager of programs at the U.S. Chamber of Commerce. She pays about $600 a month in student loans, which went toward a master's degree in international affairs from George Washington University, a degree she now wishes she had not gotten.

"I don't make enough money to pay for my debt," said Divine, who lives in the District. "I end up using credit cards to get by, and it's gotten out of control."

She has tried to cut her spending so that she can make more than the minimum monthly payment on her credit card debt. She does not go to fancy restaurants. She doesn't shop for clothing. She even decided to share a bedroom with a friend to cut down on her rent, which is now $360 a month. When she runs out of cash, she uses credit to pay for groceries, her cellphone, or emergencies.

"I had to pay my gas bill this week," she said. "I had no money to pay for it, and I had to put it on a credit card."

According to Moody's latest report, cardholders are paying back less of their debt. In November, they paid back, on average, 17.9 percent of their credit card debts -- about 3 percent lower than the previous November rate of 18.5 percent.

The report also revealed that the number of people more than 30 days late on their credit card payments in November rose from 3.89 percent a year ago, to 4.28 percent, the highest it's been since March 2005. It was the fifth consecutive month-to-month increase.

Part of the reason so many people are struggling with credit card debt now is that they can no longer tap home equity loans.

Now that housing prices have dropped, homeowners are also less able to extract cash from their properties. Homeowners cashed out only $38 billion from refinances in the last quarter of 2007, the lowest in more than three years and nearly half as much as in the same period in 2006.

"People can't use their home as a piggybank," said Travis B. Plunkett, legislative director for the Consumer Federation of America. "They can't rely on home equity with regard to spending, so they're increasing credit card spending because it's the last place they can go if they want to have access to credit."

Industry analysts said they are also noticing another trend: Banks are starting to get pickier about who they extend credit to and how much they give them. And if existing customers miss a payment or are delinquent, banks are jacking up rates, assessing fees or decreasing credit limits.

Credit card issuers that target subprime borrowers are pulling back the most, said Andrew Davidson, vice president of competitive tracking services for Synovate's financial services group. Among them are Washington Mutual and Discover, both of which have reported drops in earnings. That has made it difficult for these cardholders to transfer their balances to cards with lower rates.

"Today's consumer is charging his groceries. He's charging his medicine. He's charging his gasoline so he can get to work," said Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling. "Now he's maxed out. He's not a candidate to open up new lines of credit. He says, 'Oh my gosh, what am I going to do? I'll file for bankruptcy.' "

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