In an unusual fall-out from the housing crisis and the extended economic downturn, an increasing number of consumers choose to pay their credit cards over their mortgages, according to a new study by credit rating agency TransUnion.
“Conventional wisdom has always been that, when faced with a financial crisis, consumers will pay their secured obligations first, specifically their mortgages,” said Sean Reardon, the author of the study and a consultant to TransUnion. “However, a recent TransUnion analysis has found that increasingly more consumers are paying their credit cards before making mortgage payments.”
According to the report, the shift in the percentage of consumers who choose to pay their credit cards over their mortgage payments first became apparent in the first part of 2008. According to the latest numbers, even as the economic downturn shows early signs of a turnaround, the reversal of payment priorities has become even more apparent.
The percentage of consumers who chose to pay their credit cards, but not their mortgages increased to 6.6 percent in the third quarter of 2009, up from 4.3 percent in the first quarter of 2008, when the reversal first appeared, a 68 percent increase. At the same time, the percentage of consumers who were behind with their credit card payments, but current on their mortgages, decreased to 3.6 percent in the third quarter of 2009 compared to 4.1 percent in the first quarter of 2008.
A closer look at the numbers, however, indicate that the reversal of payment priorities might not so much be driven by consumers in general, as by consumers with poor credit and those living in areas where housing values have dropped the most.
Firstly, according to the report, people with bad credit were much more likely to reverse their payment priorities and choose credit cards over mortgages. The flip in payment priorities was evident first among people with poor credit. In addition, the percentage of consumers with bad credit who chose to pay credit cards over mortgages was much higher than that for consumers in general, and it increased much more, jumping from 19.1 percent in the fourth quarter of 2007 to 29 percent in the third quarter of 2009. That is almost five times as much as the national average of 6.6 percent.
Paying credit cards before mortgage payments makes a lot of sense for consumers with bad credit, who have no other options to fall back on when their income goes down. By necessity, more people in this segment are forced to prioritize keeping the line of credit on their credit cards open. In addition, many people with bad credit are low-income earners, who traditionally may prioritize house ownership less than middleclass consumers.
The other subsegment of consumers driving the reversal of payment priorities are people living in states like California and Florida, where the fall-out from the housing bubble was most pronounced. In California, the percentage of consumers who chose to pay their credit cards, but not their mortgages almost tripled from 3.5 percent in the third quarter of 2007 to 10.2 percent in the third quarter of 2009. For Florida, the percentage rose from 5.1 percent to 12.4 percent in the same period, a 143 percent increase, compared to the 68 percent increase for the country as a whole.
Because of the giant housing bubble in those states, many house owners in California and Florida are under water: houses have fallen so much in value that many owe more on their mortgages than the house is worth. In short, the shifting payment priorities could as much be a sign that more consumers are choosing to walk away from their mortgages, as their equity in the house evaporates or even goes negative.
The report does not offer any information about whether the national trend towards reversal of payment priorities would hold up if those two groups of consumers were excluded, and the study’s author could not be reached for comments. In addition, statistically, it would be difficult, if not impossible, to parse out how many consumers in other states chose credit card payments over mortgages, because the value of their house has dropped below the value of the mortgage.
In short, from the numbers it is unclear whether consumers in general are redefining how they manage their finances and choose which payment obligations to honor, or if the reversal is driven by subsegments of consumers, who have some very good reasons to choose credit card payments over mortgages.
Nonetheless, with Americans’ savings rate standing at near zero over the past decades, there can be little doubt that many consumers in general were ill prepared for the current economic downturn. Combined with the pull-back in other types of consumer lending, it is no surprise that many consumers are forced to turn to credit cards as their only resort to cover daily expenses.
