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Credit cards versus mortgage payments: which would you pay first?

by Peter Andrew
Credit cards versus mortgage payments: which would you pay first?

Imagine you’re in financial trouble (and let’s hope that’s really, really hard for you to do). Maybe you lost your job some months ago and have burned through your savings. Perhaps you’ve been faced with unmanageable medical bills. Or it could be that you you simply overextended yourself during the boom years, and are now facing up to the reality of too much debt.

Whatever the cause, you sit down one Saturday morning to sort out your bills, and realize that there’s enough money to pay only one out of your mortgage, your auto loan and your credit cards. So how are you going to prioritize your payments?

Credit cards come a poor second in theory

According to a February poll, conducted by Zogby International and commissioned by the TransUnioncredit bureau, respondents prioritized payments as follows:

  • Mortgage: 79 percent
  • Auto loan: 5 percent

But those who face the dilemma for real seem to act differently.

Credit cards come first in practice

TransUnion says there was a tipping point back in the first quarter of 2008 among people who had both credit cards and mortgages, and who were in financial trouble. Up until then, people paid mortgages ahead of cards. But that quarter, for the first time, credit cards were paid ahead of mortgages.

That trend has continued and grown right up until September last year, although there are now signs that it may have begun to decline. In the first quarter of 2008, the percentage of consumers who were delinquent on their mortgages but current on their credit cards was 4.3 percent, while 4.1 percent were the other way around. The figure for those prioritizing cards over mortgages peaked in the third quarter of 2010 at 7.4 percent of all consumers, but fell back slightly–for the first time in nearly three years–to 7.24 percent the following quarter. At the same time, the number of those who were current on their mortgages but delinquent on their cards dipped to an all-time low of 3.03 percent that quarter.

Why the disconnect?

So why the disconnect between the theory (what people who aren’t in trouble say they’d do) and the practice (what those in trouble actually do)? There seems to be no research to explain it, but here are some possible reasons:

  • Reality intrudes: It’s easy to say you’d keep your eye on the big picture when you’re not struggling. It’s more difficult when you don’t know how you’re going to put food on your family’s table.
  • Credit card companies are more scary than mortgage lenders: Miss a mortgage payment, and you can expect a few letters and calls. The real sanction, foreclosure, could be a year or two away. Miss card payments, and your credit card companies could decline transactions and trim your credit limits, robbing you of vital lifelines.
  • Credit card rates: Miss two payments in any six-month billing cycle and your credit score could plummet and your credit card rates could skyrocket to something close to 30 percent. That’s a real burden for those with significant balances.

In short, it should be no surprise that, when credit card useis the difference between sinking and swimming, you’re going to protect your plastic. Whether that’s a good thing or not is a whole different story.

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