OVERWHELMED BY DEBT WITH LOW FINANCING OFFERS AND SPENDING SPREES, CONSUMERS ARE HEADING FOR A CREDIT CALAMITY.

Byline: Barbara Correa Staff Writer

So you went ahead and bought that new car last summer, not knowing how long zero-percent financing would last. Then you lost your job and started paying your rent with a credit card.

You promised yourself you wouldn't splurge on Christmas gifts but there were so many bargains and you didn't want to show up empty-handed at the family Christmas Day party.

Congratulations! You've spent yourself into credit-debt hell.

After a relentless spending spree brought on by rock-bottom interest rates and a post-9-11 characterization of shopping as a patriotic act, many Southern California consumers are waking up to a hard reality: The party's over.

America is headed for a credit bubble. Credit cards are maxed, personal bankruptcies are shooting through the roof and consumers all over Southern California are rushing to the nearest credit-counseling office.

``Right now, we are just booked up,'' said Susan Bierly-Craig, vice president of Springboard, a nonprofit consumer-credit counseling agency based in Riverside with 35 offices throughout Southern California. ``The greatest influx is generally in January and February, so to be booked up in advance of Christmas (was) unusual.''

Consumer credit rose $1.5 billion in October to $1.72 trillion, its smallest gain in more than a year, signaling that consumers are beginning to realize what easy-spending habits have wrought. In September, outstanding consumer credit rose $4.7 billion, after jumping $10.8 billion in July.

The numbers include both revolving credit - such as credit cards - and nonrevolving credit, such as car loans and student loans.

Meanwhile, nonbusiness bankruptcies hit a record quarterly high of 401,306 in the third quarter this year, up 13 percent, from 349,981, in the same period last year, according to the American Bankruptcy Institute.

The Federal Reserve has been steadily cutting the federal funds rate (the overnight bank-to-bank lending rate) since the end of 2000. Those cuts have trickled down to make big purchases like cars and homes more attractive and have made credit-card rates more competitive.

But they have also made credit easier to get, or so it seems to many consumers.

For example, lower mortgage rates are encouraging people to think of themselves as first-time homebuyers, when their credit profile tells a different story. That's resulting in more people falling into debt they can't dig out of.

``You have an ad that says we can make anybody a homebuyer,'' said Richard Pittman, director of counseling and housing at Consumer Credit Counseling Service of Los Angeles, a nonprofit agency headquartered in Commerce, with 12 satellite offices from Long Beach to Palmdale. Its average client carries a credit-card debt of $18,000 to $20,000.

``It says the average rent in L.A. is $1,100; we can get you into a home for $1,500. And that could be a logical decision. But if you're paying 50 (percent) or 60 percent of your income to a house payment, you have no safety net.''

He said in the past six months, he's seen a lot more clients in debt because they tried to become first-time homebuyers without any backup.

Susan Bierly-Craig, who's been with Springboard for 13 years, blames the spike in debt on advertising and a refusal to live frugally.

``We live in a society that tells us we need these things in order to be happy, in order to be productive, when in fact, we want them,'' she said.

``People need to distinguish between want and need. A lot of young adults grew up with affluent parents, getting everything they wanted and now they're having to make tough choices because their incomes don't match their expectations.''

In the meantime, the consumer-credit industry has evolved to make money off impulse shopping and the addiction to instant gratification. Interest rates were once capped at 10 percent. Now they can approach 30 percent.

Payment structures have also changed as credit-card companies have reduced the margins between interest and principal to as low as 1 percent.

``They've reduced the minimum payments as a percent of the balance and by doing that, it takes the (customer) a lot longer to pay it off and they're paying more in interest,'' said Shelley Curran, a policy analyst at the West Coast office of Consumers Union.

The consumer-advocacy group has sponsored several state initiatives that would require credit-card companies to print on bills how much interest a customer is paying and how long it will take to pay the balance. The most recent bill was blocked last summer by card issuers and is still in legal limbo.

Other factors for the stampede to credit-counseling centers have nothing to do with credit-card companies or consumer-spending habits. In many cases, stock-market losses have driven people into debt. It's also fueling demand for reverse-mortgage counseling, said Pittman.

A reverse mortgage is exactly what it sounds like. A homeowner uses the equity in his house as collateral for a loan. Demand for that is rising as Southern Californians find half their portfolios have been wiped out - and they're still carrying that ugly credit-card debt.

So what's a maxed-out consumer supposed to do?

Organizations across the region offer debt-management programs and counseling sessions, increasingly over the phone or Internet. Predatory credit-consolidation services abound, so consumers may be better off approaching nonprofits first.

The standard process is an initial review session in which a counselor assesses the client's debt profile, stability of income, spending habits and budget. If it's determined that the client is able to continue making minimum monthly payments, he is typically advised to continue doing that.

Monster debt

About one-third of clients seen at the Consumer Credit Counseling Service of Los Angeles have credit-card debt so large they won't be able to pay it off in their lifetimes - not if they are paying up to 30 percent interest on their cards, counting penalty fees.

When clients enter the debt-management program, the credit-counseling service becomes a negotiator between the client and the creditors. Pittman says his agency can negotiate interest with creditors down to about half, and the client then makes one consolidated monthly payment to the go-between agency.

The arrangement is attractive to creditors, too, because it allows them to get some money back, whereas if the client just stopped paying or declared bankruptcy, the debt is ``charged off'' and represents a total loss to the credit-card company.

After the debt payment is negotiated, it's up to the consumer to stay committed to making the payments and stop using credit for three to five years.

That can require draconian penny pinching.

Anne Viricel, a veteran of Springboard's debt-management program in Alta Loma, recalls one of the money-saving strategies that helped her eventually pay off $28,000 in credit-card debt: Stockpiling packets of bleu cheese dressing from Carl's Jr. to eat with frozen vegetables.

``It was very stressful,'' said Viricel, who was plunged into debt when she got divorced. When she entered the debt program in 1993, Viricel had 24 credit cards demanding $700 in monthly payments. Her job at the time - working in collections for the city of Upland - paid just $97 more a month than her $1,200 house payment.

``They got the (credit card) payment down to $330 a month and it got paid off in five years,'' she said.

One big fear consumers with credit debt have is that if they enter a debt-management program, it will hurt their credit. But Viricel said it never affected hers.

``I just went to buy a new Audi and they ran my Social Security number and that was it. They said I had top-tier credit. That felt good.''

CAPTION(S):

3 charts, drawing

Chart:

(1) Outstanding Consumer Credit

(2) Debt-to-Service Burden

(3) Personal Bankruptcies

SOURCES: Federal Reserve and American Bankruptcy Institute; staff research

Drawing:

(color) no caption (Man with credit cards on his back)

Staff graphic