Americans Begin Paying Credit Cards First, Mortgages Second [CHART]

The recession has forced many struggling families across the country to confront a difficult decision: pay off credit card bills or make mortgage payments.

Before the downturn, Americans predominately opted to stay current on their mortgages before tackling other nagging debts. This pattern, however, has changed. More U.S. borrowers are choosing to pay credit card bills and let mortgage payments run delinquent, according to reports by TransUnion, a credit management company.

In the fourth quarter of 2010, 7.24 percent of U.S. 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," notes Sean Reardon, the author of the study and a consultant in TransUnion's analytics and decisioning services business unit.

Only 3.03 percent of Americans in TransUnion's report fell behind on credit card payment in favor of making mortgage payments in the fourth 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 mortgage and credit cards.

TransUnion found Americans first switched their "payment hierarchy" 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, Reardon says, were the two primary drivers in making the U.S. "less cash dependent and more credit dependent."

Increasing numbers of Americans have fallen underwater on their mortgages since the recession first began. By the final quarter of 2010, 23 percent of all U.S. homeowners owed more on their mortgages than their homes were actually worth, according to business information provider CoreLogic.

A simultaneous decision by the credit card industry to tighten lines of credit only intensified pressure on consumers to stay current. Missed mortgage payments might have more dire consequences down the road, Reardon noted in an interview, but struggling consumers quickly realized that a good credit line keeps food on the table today.

Despite the behavioral switch, Americans as a whole still say when asked that they care more about mortgages. In a February Zogby International survey by Transion, 79 percent said they would pay their mortgage first if forced to make one payment. Only 9 percent said they'd choose the credit card bill.

So-called "highest risk" homeowners -- often subprime borrowers -- are most likely to choose credit card payments over mortgage payments, the study finds. Of that demographic, which collectively switched their "payment hierarchy" earlier than the nation as a whole, 30.4 percent were mortgage-delinquent, credit card-current in the last quarter of 2010.

This is far from just a subprime issue, however. "Initially it was," Reardon says, "but it spread across all risk segments. It's now an issue at the national level."

In the chart below, the red curve denotes delinquent mortgages, current credit cards. The green curve denotes current mortgages, delinquent credit cards. The purple curve denotes delinquency on both:

Comments

[KWSN]

01:57 AM on 04/08/2011

The old folks used to say, outside of housing and transportation, if you can't pay for it cash you don't need it.

[roudy]

01:08 AM on 04/08/2011

I try to keep it simple, I don't pay either one.

[MSROADKILL612]

09:55 PM on 04/07/2011

Its not the card thats the problem, its lacking the discipline not to use it. If you cant afford it, you sure cant afford it +20% pm.

[Dana M SchweersHardaway]

06:57 PM on 04/07/2011

How crazy is this? Seriously--the first lesson I learned as an adult was: PAY YOUR RENT/HOUSE NOTE before you pay ANYTHING ELSE. At least you have a place to live. You might not have electricity, heat, water...whatever. I mean, I've lived off 14 bucks for two weeks, eating beans and rice, but by golly, my rent was paid. Who pays a freakin' credit card first? Can you eat that credit card? Nope. Will it put a roof over your head? Nope.
GET A CLUE, people!! PAY TO LIVE, and then pay to play.

[spinotter11]

07:26 PM on 04/07/2011

But you are not considering that the family may have already decided to walk away from an underwater mortgage and thus are saving money during foreclosure proceedings by not paying their mortgage. But they must keep an available credit line in case of emergencies, and for many people that credit line is a credit card. Does this make sense to you?

[Realtors Are Liars]

02:54 PM on 04/07/2011

"Home prices collapse for seventh month in February"

http://www.marketwatch.com/story/home-prices-fall-for-seventh-month-in-february-2011-04-07

[spinotter11]

07:27 PM on 04/07/2011

Figures!

[lletaa]

12:42 PM on 04/07/2011

The healthinsurance bill is now bigger then the mortgage bill. Thats what's sucking all the money out of the middle class.

[builderman55]

11:08 AM on 04/07/2011

Listen up everyone! The rules ofnthe economic game in America are stacked against the middle and lower class. There is no longer any discernible line between corporate and government policy. Obama's support ofnthe middle class has been tepid at best and the GOP hyenas are already gathering around the newly birthed agencies and policies designed to help us to tear them to shreds I had a $2 million home building business in 2007 that I buily in 7 years without a vacation, putting every dollar back I to the business, that went down in flames during the housing crash. I lost everything,including my home and ended up in a Chapter 7 bankruptcy. The worst days of my half century life. But guess what--there is life after bankruptcy. You will be able to get credit relatively quickly again and the constraints of the bankruptcy force frugality. My advice is: file bankruptcy--walk away from the predatory credit card companies. This will accomplish many things--it will send a strong message that we have had enough. And they will have to deal with you on better terms afterwards because the economy needs our business. itnis a wrenching decision, but life afterwards will be better.

[dporterdvd]

08:40 AM on 04/07/2011

People aren't paying their underwater mortgages because they feel like they are victims of a big pyramid scheme perpetrated on them by Big Banksters and Wallstreet.

[cyclone70]

06:34 AM on 04/07/2011

pay em off cut em up

credit cards are the means to debt slavery

problem is you can't avoid them if you need to buy online, rent a car, check out a hotel so for so keep your best one and use sparingly

[James McGill]

02:18 PM on 04/07/2011

Never seen anything on your list that could not be done with a debit card. To be more precise, I have done all those things with a debit card, though I use American Express more often these days, since most of my online purchases and all my travel is for business, and Amex tends to be simpler, and has attractive rewards provided someone else is paying the annual fees.

[cyclone70]

04:24 PM on 04/07/2011

debit cards often have fees, and offer no fraud protection unfortunately

[Mister Grumpy]

03:58 AM on 04/07/2011

Well......... the simple explaination is that if given the choice between a mortgage or a credit card payment, the credit card payment will win out because of its smaller required payment to stay current..........

It's very likely the homeowner doesn't have the income to make the higher payment to keep the mortgage current. Plus if you're living week to week on a limited income you can still use your credit cards so long as you keep making the minimum payments.......

If keep your mortgage current, you may have to eat your lawn to survive..........

[americaforme]

02:54 AM on 04/07/2011

They dont pay their mortgages first, because they wont be able to buy or sell. Our Banking financial system was set up on dependency of Americans to swipe the card. Even with no money, they opt at using the card. Americans know longer understand that life goes on without a credit rating, its like an alcoholic, or drug addict, a never ending chokeing noose about the neck. These financial products (cards) have reduce us to the biggest slavery in human history.

[James McGill]

02:20 PM on 04/07/2011

I take except to your premise that credit card debt "is the biggest slavery in human history."

[builderman55]

02:42 AM on 04/07/2011

File for bankruptcy, walk away from your mortgage to send a message to cc companies and mortgage companies that we have had ENOUGH. That'll get their attention.

[Mr Hankey]

01:03 AM on 04/07/2011

This is a bit of a slanted view, isn't it?

Realize that homeowners in default are often not paying their mortgage because the bank requires them to default in order to pre-qualify for a mortgage modification. (I've poken to enough homeowners and read enough articles to conclude that this bank policy is widespread, and is not particular to just one bank/servicer.)

Also, many homeowners in default are in the middle of a legal battle - so why pay if the bank is going to try to steal your home with fraudulent paperwork? If the homeowner can get the bank to work with them, there is usually a forebearance anyway.

[James McGill]

02:52 PM on 04/07/2011

A partial payment to a mortgage company is treated exactly the same way as a non-payment.

If you've been through the process of trying to get a loan modification or a short sale, or anything else besides "paying in full on time", you know that it's months of sitting on hold for hours, mailing the same 50 page stack of documents, faxing these same documents, having the lender drop them on the floor or claim to have not received them, sending them again, and again, the whole time with a real estate agent failing to attract even a low-ball offer on your property, maybe renting out at let's say 60% of your monthly payment just to buy time, and eventually, getting a notice that the property was sold to a trustee on the courthouse steps.

In my case, I would have actually paid money to *accelerate* things to that last step. I wish the bank had an option where it was simple for the borrower to say "I surrender my equity and vacate this property" and have that be the end of it. A borrower willing to do that shouldn't have any more consequences than loss of equity and surrendering the property.

[SweetTart]

12:59 AM on 04/07/2011

If you are in a position to buy a nice piece of land - do it, then put a tiny house or small environmentally friendly prefab on it.

[Mister Grumpy]

04:01 AM on 04/07/2011

As long as the zoning codes allow it, and you can find clean water........ which is getting really hard to find in some places.............

[James McGill]

02:53 PM on 04/07/2011

Nice pieces of land are out there. Unfortunately, they don't tend to be anywhere near any place where I can practice my profession.