Credit Card Debt vs. Mortgage Payments

Your mortgage is a “secured” debt. That means that if you get seriously behind with your payments you risk losing your home through foreclosure. Credit card debt is “unsecured.” So being delinquent with your payments may be expensive and ruin your credit report. But it’s unlikely to leave you homeless.

You’d think that it would be common sense to prioritize mortgage repayments over those for credit cards. But most Americans who find themselves unable to pay both are choosing to keep up to date with their cards.

New Payment Hierarchy

This strange phenomenon first arose in the first quarter of 2008. For the first time, more people were current with their credit cards and delinquent with their mortgages than the other way around.

But a new report, published yesterday, from TransUnion says that the practice of prioritizing credit card payments is becoming more widespread. In the third quarter of 2009, 6.6 percent of consumers were behind with their mortgages while current with their cards. At the same time, just 3.6 percent were current with their mortgages while delinquent with their cards. Those figures are starkly different from those in the first quarter of 2008, when the numbers were 4.3 percent, and 4.1 percent respectively.

Worse for Bad Risks

Those in the lowest scoring risk segment were much more likely to prioritize keeping their credit cards current. Twenty-nine percent of those in that category were paying their cards while letting the mortgages slide in the third quarter of 2009, while only half that number were giving preference to their mortgages.

Credit Card Trends

This shift in mortgage and credit card trends is probably being driven by a number of factors. Ezra Becker, TransUnion’s director of consulting and strategy for its financial services business unit, identifies some:

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. 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.

Other Factors?

The TransUnion report doesn’t try to go further and explain why this change in many people’s payment hierarchies has come about. However, five possible causes come to mind.

1. Credit card companies are generally more aggressive in chasing delinquencies than many mortgage lenders.
2. Cards provide an immediate source of credit, and losing the use of them can mean being unable to buy food, cover transportation costs, and generally access things that are immediately essential.
3. Too many people are unrealistically optimistic, and think that “something will come up” that can rescue them from a seemingly distant foreclosure.
4. Whether you’re behind on your mortgage payment or your credit card payments makes little difference to the impact on your credit report.
5. Credit card companies have made late payment and overlimit fees much more expensive in recent years

But, whatever the causes, the trend toward paying credit cards at the expense of mortgages is likely all too often to end in tears.

Published 02/04/10 (Modified 04/23/12)