Consumers paying credit cards first, mortgages second | Business
The recession has forced many struggling families across the country to confront a difficult choice: pay off credit card bills or make mortgage payments.
Before the downturn, consumers overwhelmingly opted to stay current on their mortgages before tackling other nagging debts. This pattern, however, has changed. More consumers are choosing to pay credit card bills and let mortage payments run delinquent, according to TransUnion, a credit management company.
In the fourth quarter of 2010, 7.24 percent of homeowners were mortgage-delinquent and credit-card current. While that's down from 7.40 percent in the third quarter, it remains 72 percent higher than it was at the beginning of the Great Recession. Only 3.03 percent of consumers in TransUnion's report fell behind on credit card payments in favor of making mortgage payments in the last quarter of 2010, the lowest percentage on record.
The report compares three groups: those 30-plus days delinquent on mortgages, but current on credit cards; those current on mortgages, but 30-plus days delinquent on credit cards; and those 30-plus days delinquent on both their mortgages and credit cards.
TransUnion found consumers first switched their payment choice over to credit cards from mortgages just months after the 2007 financial collapse. High unemployment and a sagging housing market that left many borrowers owing more than their home is worth, were the two primary factors in making consumers less cash dependent and more credit dependent.
Increasing numbers of consumers have fallen underwater on their mortgages since the recession first began. By the last quarter of 2010, 23 percent of all homeowners owed more on their mortgages than their homes were actually worth. In the DC Metro area that number is greater due to higher appraisal values.
A simultaneous decision by the credit card industry to tighten lines of credit only increased pressure on consumers to stay current. Missed mortgage payments might have more dire consequences down the road, but struggling consumers quickly realized that a good credit line keeps food on the table and other necessities like utilities up and running today.
Despite the switch, consumers as a whole still say when asked that they care more about mortgages. As recently as February, 79 percent said they would pay their mortgage first if forced to make one payment. Only 9 percent said they would choose the credit card bill.
So called "high risk" homeowners- often subprime borrowers- are most likely to choose credit card payments over mortgage payments, the studies find. Of that demographic, which collectively switched their payment choices earlier than the nation as a whole, 30.4 percent were mortgage delinquent, credit card -current in the last quarter of 2010.
But now this switch in financial priorities has spread across all risk segments. It's now an issue on the national level.