Most homeowners erase those debt consolidation messages from their answering machine when they come home. Trouble is, too many don't.

In what is proving to be a seismic shift of consumer debt, more and more Americans are consolidating credit card balances into loans and lines of credit secured by their homes.

Indeed, an estimated 5,500 households a day used equity loans to pay off an average of $6,500 in card balances in 1996 and 1997 alone. That means people are enjoying more tax deductions and paying lower interest rates on their obligations than they otherwise would.

But at the same time, the rapid growth of home equity borrowing hasn't kept credit card borrowing in check. That means people are falling deeper into debt, rather than climbing out of it.

Too many just charge up cards again
Between 1992 and last year, for example, outstanding balances on general-purpose credit cards rose to an estimated $453.6 billion from $203 billion even as outstanding home equity loan balances climbed to $524 billion from $272 billion. One major problem, experts say, is that too many consumers who take the home equity tax-and-rate bait just end up charging again, putting them right back where they started.

What does all of this mean? Frankly, that consumers need to carefully weigh their options before following in their predecessors' footsteps and consolidating debt by borrowing against their homes. Although most people have avoided serious financial trouble because of the good economic times, an analysis of several sets of statistics and interviews with credit experts suggest that people may be biting off more than they can chew -- in increasing numbers.

"There's not much mystery here. There's been a very aggressive marketing of home equity loans as a way to reduce credit card debt," says Bruce Brittain, president of Brittain Associates in Atlanta. The consulting firm produces studies on credit card and equity loan trends. "You can hardly turn your TV on without seeing Dan Dierdorf or Dan Marino or some ex-jock pitching these kind of loans. It's everywhere you look.

"From a purely economic perspective, it's a reasonable thing to do, and they've made it easier, too," he adds. "But not everybody is created equal when it comes to managing their money. There are people who are credit addicts. They just can't live within their means and credit cards give them an option to live outside of their means.

"We are an 'I want it now' society."

The "wealth effect" also fuels debt
How did we get to this point? Ironically enough, some of the same economic forces that have helped boost the wealth of many Americans -- rising stocks, plentiful jobs, abundant cash floating around, appreciating home values -- may be laying the groundwork for its loss.

When people don't have to worry about where their next paycheck will come from, they don't worry as much about spending now and paying for it later. Consumers with homes and shares that appreciate month after month don't care as much about larger bills either, because they anticipate having enough money in the future to pay them off. While this "wealth effect" has many positive benefits, it also fuels a rise in debt.

On the business side of things, prosperity makes companies more comfortable with risk. But it also forces them to work harder to produce the kind of profits that shareholders or other investors expect. In most cases, they can do so by either mining a larger vein of customers or getting their current customers to spend more. In the spirit of the latter, many lenders have begun pushing home equity loans instead of other financial products because they generate greater returns than credit cards and are more likely to be paid back -- or recouped through less pleasant means.

"The last few years, we've seen a leveling off in the growth in credit card outstandings," says George Yacik, a vice president at SMR Research Corp. in Hackettstown, N.J. The consulting firm produced the 1990s card and equity loan balance statistics. "The outstandings are not growing in the same extent largely because they are going out the door to home equity and mortgage lenders."

Potential to make life easier
That has the potential to make life easier for a lot of people. Consumers can deduct the taxes on home equity loan interest, with certain restrictions, and they pay much lower interest rates. Closed-end home equity loans had an average rate of 8.82 percent in late August, for example, while open-ended lines of credit had an average rate of 8.16 percent, according to Bankrate.com surveys. That compared with an average fixed rate of 13.29 percent for standard credit cards.

But most people don't eliminate the card debt and call it quits; they keep going.

"People still charge heavily on cards," Yacik says. "People use cards more heavily and in more places."

Brittain's firm, for one, surveyed more than 6,000 households about their spending and credit habits during a recent study. Researchers found that only 30 percent of the borrowers who used equity loans to retire card balances remained without any 11 months later. On average, they had racked up another $2,133 in charges.

"From the group, some will experience problems," he says. "We are consumers, not particularly good savers."

People have also wiped out some of the benefit that lower equity loan rates provide by applying for larger credit lines and spending more on them. For instance, the average approved line of credit increased to $40,974 in 1998 from $32,095 in 1992, according to figures provided by the Consumer Bankers Association. The average outstanding balance, meanwhile, climbed to $26,810 from $21,404.

Interest may be tax-deductible
"From a consumer standpoint, people who are aware of exactly what their real cost of credit is, who realize certain things may be tax-deductible when attached to their home when it otherwise wouldn't be, there's an incentive there," says Rick Harper, director of housing at the Consumer Credit Counseling Service of San Francisco. "Secondly, we know families are just burdened with consumer debt and, from a cash flow standpoint, if I transfer my unsecured debt to my home, I can improve my cash flow substantially by spreading that over 15 or 20 years or whatever the lender will allow me to do.

"But transferring unsecured debt to the home can be dangerous if you don't change your spending habits," he adds. Without that change, "Obviously, you're going to run up the credit card balances again ... so we advise a lot of people and help people think through the process."

Whether people are thinking carefully enough is debatable. But debt is clearly pushing more people beyond the point of no return today than at almost any other time in recent history. U.S. consumer bankruptcy filings set an annual record in 1998 and are on track to come in just below that level this year, according to the American Bankruptcy Institute.

To date, no one seems to be predicting that consumers will walk away from their equity loans en masse. Delinquency rates on both equity loans and lines of credit were relatively low by historical standards in the first quarter of 1999, according to a recently released survey by the American Bankers Association.

Yet the same study showed that 3.58 percent of credit card accounts were at least 30 days past due in the first quarter of 1999. That's the 17th quarter in a row in which more than 3 percent of accounts were delinquent -- a record stretch for the 19 years ABA has done its poll. It's also an indication that even the widespread use of home equity loans for debt consolidation hasn't kept consumers from falling behind on their credit card obligations.

Prudent underwriting and credit-screening are the keys
Lenders say prudent underwriting and proper credit-screening are the keys to keeping more spend-happy consumers from getting loans, running their cards back up and ending up in bankruptcy themselves. By only allowing people with the best credit to get high loan-to-value second mortgages, for instance, companies can protect themselves from excessive defaults while still making credit available to those who need it.

"All of us in the industry and in the consumer education, consumer advocacy groups understand that getting a home equity loan without looking at your whole package of debt is not the way to go," says Jeffrey Zeltzer, executive director of the National Home Equity Mortgage Association in Washington, D.C. "You need to look that you as a consumer are managing the rest of your debt portfolio clearly."

But with home lenders scared of this year's climbing rates, experts say it will likely get easier to borrow in the future, rather than harder. Companies who hired employees in droves to sell first mortgages, home equity lines of credit and other financial products when rates plunged last fall are looking to drum up business any way they can. That foreshadows the arrival of ever-looser lending standards.

"After the previous mortgage boom, which ended in late '93, early '94, a lot of mortgage lenders moved more heavily into home equity product to pick up the slack," says Yacik of SMR Research.

For now, the best advice that consumer advocates can give to potential borrowers and debt consolidators is "Know your limits." Even if the company from your answering machine permits you to exceed those limits, the consequences of late payments, bankruptcy or foreclosure are going to rest squarely on your shoulders -- not the lender's -- should problems arise.

"If you need tuition for a child or you need a new automobile and you've managed your budget well, it's a great way to tie that to your house so you can deduct the interest," says Harper, the CCCS counselor. "But consumers need to be wary of the total cost when they do this.

"Some people say they can't sleep at night. They're managing this, but it's a juggling act," he adds. "If you feel uncomfortable every month, if you feel uneasy cash flow-wise because you're not sure what's going to happen, that's a danger sign."

-- Posted: Sept. 1, 1999