Americans in Debt: 'Using Home Equity as an ATM Machine'

June 17, 2008— -- John LaPerch of New Milford, Conn., pours through the half dozen unpaid credit card bills -- $78,000 of debt -- that keep him up at night.

LaPerch is like the millions of Americans who, at the height of the housing boom, watched the value of their homes go up, along with the number of sweet deals arriving in his mailbox.

"I had a $1,000 credit limit," LaPerch said. "Next thing I know, it's up to 14 grand."

Though he says he never requested the limit increase, which just "showed up," LaPerch also admits he took advantage of it.

At the peak of the housing boom, from 2001 to 2006, a USA Today analysis shows credit card companies quietly rose cardholders' spending limits -- on average, 17 percent to more than $8,000 a card -- and in many cases, much higher, without consumers asking for it.

Then the banks told consumers: You can pay off those rising credit card bills by borrowing more, such as taking a loan out on your house or getting a home equity loan.

One consumer advocate says that, for the banking industry, it became a "lucrative hamster wheel."

Travis Plunkett, of the Consumer Federation of America, explained, "In many cases, consumers didn't simply use home loans to pay down their credit card debt. They ran up more credit card debt. This was a vicious cycle."

But this was a cycle that's now crashed as home values have plummeted.

Homeowners now face not only those credit card bills, but the loans they took out to pay for them.

Kenna Baker, a wife and mother living in Des Moines, Iowa, now fears her family could lose their home.

"I probably owe about $140,000, with the house and everything," Baker sadly admits. "When you haven't had credit, and you are trying to establish it, you want to get credit. [The offers] just don't stop after a while, because, you know, they go to your credit report, they look at how many credit cards you have, and instead of saying, 'Oh, she has too many credit cards, too much debt,' they ignore that, they go ahead and give it to you. And they just should not do that."

Representatives of the banking industry say this is not the industry's fault.

"I think the issue really has been: Was there prudence on the part of borrowers to not extend themselves too far? Many were using their home equity as an ATM machine," said James Chessen, of the American Bankers' Association.

Representative Carolyn Maloney, D-N.Y., is a sponsor of the Credit Card Bill of Rights.

The banks "were the ones who gave [consumers] the ATM machines, an ATM machine they could not afford and one that got them into debt over their head," she said.

Maloney's bill is designed for people like John LaPerch, whose chronic fear is that he'll "never be able to pay this off."

But that protection could come too late for LaPerch and the millions of other Americans who signed up for deals that seemed too good to be true -- and were.