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Mortgage payments take a back seat to car loans

by Peter Andrew

The way in which many people prioritize their debt repayments continues to defy traditional wisdom, according to a Mar. 29 report from TransUnion, one the the big-three credit bureaus. Instead of protecting their biggest asset, their home, they're instead choosing to let their mortgages slide while keeping current with their car loans and credit cards.

Credit cards and auto loans first

TransUnion has been tracking this trend for some time in its continuing Payment Hierarchy study. In order to reach its conclusions, it looked in each quarter of 2011 at the anonymized credit records of about four million consumers, all of whom had one or more mortgages, auto loans and credit cards. Of those who were delinquent with one or more of those:

     

     

  • 39 percent had fallen behind with their mortgages, while staying current on the others.
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  • 17 percent had fallen behind with their credit cards, while staying current on the others.
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  • Almost 10 percent had fallen behind with their auto loans, while staying current on the others.

Auto, credit card debt are growing priorities

Those figures reveal extraordinary differences in the importance that many consumers ascribe to their various debts, with more than four times as many putting their homes rather than their cars at risk, and twice as many putting their credit cards before those homes. They also show a radical and rapid change in how people perceive different sorts of debt.

 

Before the recession hit, in the last quarter of 2007, more people kept current with their mortgages than their credit cards. In the traditional way of thinking, that made sense: home loans are secured debt in which an asset is "held hostage" as collateral, while credit card debt is unsecured. But during that quarter, for the first time since such data were recorded, more people prioritized their cards over their mortgages.

That trend grew until the third quarter of 2010, after which it dipped slightly. It now seems to be hitting a plateau. At the end of 2011, about 6.5 percent of debtors were current with their credit cards while 30 days or more behind with their home loans, and a little over 2 percent were the other way around.

Why are people doing this?

Ezra Becker, vice president of research and consulting in TransUnion's financial services business unit, observed in a press release:

The reversal in payment patterns between credit cards and mortgages has been well documented, but our findings were illuminating because it had not been previously clear that auto loans were considered a higher priority by consumers than both credit cards and mortgages. With unemployment remaining high and real estate values remaining stagnant or further depreciating, consumers continued to pay their credit cards ahead of their mortgages. However, the importance of their auto loans appears to have trumped even the value they place on their credit cards.

Becker makes some good points. Many credit counselors would continue to warn that mortgages should remain debtors' top priority, but those facing a real day-to-day struggle to survive financially could be forgiven for thinking more pragmatically, particularly if their home has lost value, and their mortgage is underwater. For them, having a car to get them to work and a credit card to fill it up with gas (and feed the kids and keep the lights on), may trump making payments on something they perceive as a failed asset that's become a liability. It's hard to blame them for taking that view.

 

Published 04/04/12 (Modified 04/24/12)


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