8 million consumers drop credit cards, improve mortgage standing

More than eight million consumers stopped using credit cards during the past year, a trend which will help people qualify more easily for real estate mortgages and reduce monthly living costs.

A new study by TransUnion shows that the use of bank-issued, general purpose credit cards has fallen significantly during the past year. “This deleveraging,” says the company, “is believed to be due in part to charge-offs in the higher risk segments of the population, more conservative spending in the low-risk segments, and significant efforts by consumers across the board to maintain the health of their credit card relationships as a financial cushion.”

TransUnion says “consumers with higher incomes were just as likely as consumers with lower incomes to suspend their use of this payment option.”

“In 2009,” says TransUnion’s Ezra Becker, “well over 70 million consumers did not have an active, general-purpose bank issued credit card. During the course of one year, more than 8 million additional consumers joined these ranks, making it one of the fastest growing consumer segments. Consumers who do not have or use bank-issued, general purpose credit cards still have a need for other payment vehicles, a fact which is beginning to attract significant attention from credit and debit providers alike.”

Mortgage Ratios

Credit card debt is one of the factors considered when individuals apply to finance or refinance real estate. Lenders look at the “front ratio” and “back ratio” when qualifying borrowers. The front ratio includes the monthly cost for mortgage interest, mortgage principal, property taxes and property insurance — also known as PITI. The back ratio includes the front ratio plus regular monthly costs such as student loans, car payments and credit card obligations.

For instance, FHA guidelines allow ratios of 31/43. If the Smiths earn $6,000 per month before taxes it means that as much as $1,860 can be used for housing costs (the front ratio) while $2,580 can be used for housing costs plus monthly obligations.

In this example, the Smiths can spend as much as $720 per month on consumer debts ($2,580 less $1,860). That’s not a lot when one figures the cost of auto debt, student loans and such.

No Use – But Rising Balances

Credit card interest continues to accrue on outstanding debt whether or not a card is used. To lower monthly costs consumers must take two steps to get ahead: First, reduce if not pay off existing credit card balances. Second, not borrow from other sources such as checking account lines of credit.

Discontinuing the use of credit cards can also be important for another reason: Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 credit debt is not forgiven if you spend $750 or more in the 70-day period before seeking bankruptcy protection.

Other Findings

For the third quarter of 2010 TransUnion also found:

  • The incidence of credit card delinquency was highest in Nevada (1.28 percent), followed by Florida (1.09 percent) and Mississippi (1.06 percent). The lowest credit card delinquency rates were found in North Dakota (0.48 percent), South Dakota (0.53 percent) and Nebraska (0.56 percent).
  • Only two areas showed an increase in credit card delinquency — the District of Columbia (19.67 percent increase) and Mississippi (1.92 percent increase). The two areas of the country with the largest quarter-over-quarter drop in delinquency were Alaska (-19.2 percent) and Nebraska (-17.6 percent).
  • National average credit card borrower debt (defined as the aggregate balance on all bank-issued credit cards for an individual bankcard borrower) edged upward for the first time in six quarters by 0.28 percent to $4,964 from the previous quarter’s $4,951, but down 11.54 percent compared to the third quarter of 2009 ($5,612).
  • The highest state average credit card debt remained in Alaska at $7,159, followed by Hawaii at $5,716 and North Carolina at $5,640.
    The lowest average credit card debt was found in Iowa ($3,807), followed by North Dakota ($4,103) and South Dakota ($4,196).
  • All but 15 states showed an increase in average credit card debt from the prior quarter. The largest increases in average credit card debt over the previous quarter occurred in West Virginia (2.81 percent), Wyoming (2.2 percent) and Hawaii (2.19 percent).
  • On a year-over-year basis, national credit card originations increased for the first time since the recession began in late 2007. Only nine states showed decreases in originations since the third quarter of 2009. The states with the greatest year-over-year increases were Delaware (21.3 percent), Oklahoma (16 percent), and Pennsylvania (15.8 percent).
  • The areas with the steepest declines in year-over-year credit card originations were the District of Columbia (-10.3 percent), Minnesota (-9.6 percent), and Michigan (-4.2 percent).
  • As credit card delinquency trends differ between the national and state economies, metropolitan areas can also show different credit dynamics relative to the state level. Approximately 77 percent of metropolitan statistical areas (MSAs) showed a decrease in their 90-day credit card delinquency rates since last quarter, which is generally consistent with national trends.
  • The area with the largest drop in delinquency since the last quarter was the Dubuque, Iowa Metropolitan Statistical Area (-48.4 percent). The area with the largest increase in delinquency since last quarter was the Lewiston, ID-WA Metropolitan Statistical Area (92.7 percent).

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