Credit Cards Or Mortgages: Which To Pay First?
Conventional wisdom has it that folks will use their last dollar to pay their mortgage while other bills remain unpaid, but a new study says otherwise.
A new study by TransUnion, the big credit reporting agency, says there is now a new payment hierarchy where consumers pay their credit cards before their mortgages.
“The percentage of consumers current on credit cards and delinquent on mortgages first surpassed the percentage of consumers current on their mortgages and delinquent on credit cards in the first quarter of 2008,” says TransUnion. “This ‘flip’ is representative of the change in the conventional wisdom around the payment hierarchy, or which debt obligations consumers would choose to pay first.”
“The implosion of the mortgage industry over the last 24 months, the resetting of adjustable-rate mortgages and the weak job market have all come together to redefine how consumers are managing their finances and meeting (or not meeting) their credit obligations,” said Ezra Becker, director of consulting and strategy in TransUnion’s financial services business unit. “The insight gained through this analysis reveals a lot about changing consumer preferences. The financial services industry must recognize and adjust to the payment hierarchy shift with judicious modifications to business models, new assessments of specific areas of risk, and by strategic revisions to acquisition and account management strategies.”
Consumer Logic
Traditional thinking said that consumers put credit card bills ahead of mortgage debt. Here’s why: If you don’t pay your mortgage you’ll lose your home. If you don’t pay your credit card bills you might get sued, your credit score will fall and you may be hounded by debt collectors.
But honestly, how is someone going to take back that trip to Bermuda?
Foreclosure States
TransUnion says “within California, the percentage of consumers delinquent on their mortgages but current on their credit cards increased from 3.5 percent in Q3/2007 to 10.2 percent in Q3/2009 (a 191 percent increase). In Florida, this same variable increased from 5.1 percent in Q3/2007 to 12.4 percent in Q3/2009 (a 143 percent increase). In this same timeframe, the United States experienced a 68 percent increase (from 4.0 percent in Q3/2007 to 6.6 percent in Q3/2009).
“In contrast, the number of California consumers delinquent on their credit cards but current on their mortgages declined from 3.3 percent in Q3/2007 to 2.7 percent in Q3/2009. In Florida, this variable declined from 5.0 percent in Q3/2007 to 3.9 percent in Q3/2009.”
It’s just a guess, but maybe people are making their credit card payments because they’re using credit to buy groceries and such when faced with a job loss or some other form of income reduction. Otherwise, it still seems logical to pay the mortgage and keep a roof over your head before paying credit card debt.
© Copyright 