With Times Tough, People Piling On Debt

Gas prices are through the roof, food prices aren't far behind, jobless rolls are increasing, the mortgage mess is continuing, the housing market is still tanking, and the "R" word is on everyone's lips.

Logic would dictate Americans would be tightening their belts in times like these. But, says the The Early Show's resident financial adviser, Ray Martin, such logic would be wrong.

He said on the show Saturday that more and more of us are turning to our credit cards and home equity loans just to stay afloat.

Some, pointed out co-anchor Chris Wragge, are even using credit cards to pay their mortgages.

And that, Martin said, isn't a viable long-term strategy. It is, he said, "borrowing from Peter to pay Peter, taking out debt to pay down debt. If you're in that situation, you've got to look at all the expenses you could cut back. You've to look at how you could increase your income. You may be in such a tough situation that you really have to get into legal protection (bankruptcy). ... The way to increase your cash flow is not to take on debt. If you want to increase your cash flow, the debt has to go."

Equifax Inc. and Moody's Economy.com report that the average credit card balance is up 9.5 percent in the United States. It's up even more in states hard-hit by the housing crisis: almost 15 percent in California and Florida, and more than 20 percent in Nevada.

Credit counselors across the country confirm that more people are using their cards to cover everyday expenses.

According to Martin:

Rising prices aren't the only reason people are racking up more debt. Lenders in general have lost a lot of money in recent months as more and more borrowers default on their debts. In order to protect themselves, lenders are tightening their standards, meaning it's more difficult to obtain home loans, home equity loans, even car and school loans.

So, many people are turning to the credit they've already been issued: credit cards. And the average home equity line of credit is up 8.1 percent.

A home equity line of credit works like a credit card, with your home as collateral. The bank approves you to borrow a certain amount of money, based on the equity you have in your home. You borrow this money whenever you want it, then repay it over time.

When credit was easy to obtain and home values were skyrocketing, many people obtained these lines of credit.

While rising prices and tighter lending standards partially explain the increased use of home equity lines of credit, there's another issue at play here: People are panicking. They see that other types of credit are increasingly hard to come by. They also know that some banks are freezing lines of credit, meaning that, even if the bank promised you a $30,000 credit line and you've only used $10,000, the bank can suddenly say, "Sorry, we're changing the agreement. You can now only borrow $10,000." Banks are allowed to do that and, for the first time in a long time, they're exercising their rights in some cases. So people are grabbing the money now, just in case it disappears later.

It's as if we were suddenly told apples won't be sold next week. If you like apples, you're not just going to buy one, you are going to buy as many as you can. This is the environment of scarcity, and it causes people to horde.

It may seem like a good idea to take this credit when you can, knowing it may not be available down the road. But it's not.

If you're just taking out a home equity line of credit to build a cash cushion, to hold onto "just in case," you're simply making a bad financial choice. Think about it: Once you take out the line of credit, you'll be paying an interest rate of about 6 percent on the loan. You'll put the cash in a "safe" location, meaning it will earn about 1 percent. So you're losing 5 percent of your money just to be "safe." A better alternative is to tighten your belt, even if it's painful, and build your own cash cushion.

As for the growing number of reports that people are going so far as to charge their monthly mortgage payments: If you've become that dependent on credit, you truly need to reassess. Using debt to pay debt is never a good strategy; it's a vicious cycle from which you'll likely never escape.

Unfortunately, there's no easy answer here. The alternative is truly facing up to what you can afford and acting accordingly. That may mean cutting out cable channels, it may mean downsizing into a home loan you can afford.

Everyone's situation is different, but it's time for everyone to face the music. No matter how you do it - whether it's cutting small costs or big ones - now more than ever, you need to have a cash cushion. You simply can't get ahead by relying on debt to bail you out.