More Borrowers Pay Credit Card before Mortgage Loan

2010 February 3

More and more consumers are giving greater priority to paying credit card debt than making a mortgage payment, according to a TransUnion Study. A continuing trend occurring more readily than ever before.

The percentage of consumers delinquent on mortgages, but current on credit cards rose to 6.6% in the third quarter of 2009 from 6.3% in the previous quarter and 4.9% in the same quarter a year earlier.

“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 in TransUnion’s analytics and decisioning services business unit.

“However, a recent TransUnion analysis has found that increasingly more consumers are paying their credit cards before making mortgage payments. This analysis reaffirms the results of a previous TransUnion study that examined data between the third quarter of 2006 and the first quarter of 2008,” said Reardon.

As the U.S. economy climbs out of the worst recession since the Great Depression and unemployment remains high, financial strains have forced borrowers to prioritize monthly debt payments in order to maximize cash flow. The payment hierarchy shifts are even more pronounced in California and Florida that experienced a more severe housing bubble effect.

In California, the percentage of consumers delinquent on their mortgages but current on their credit cards increased from 3.5% in Q3 2007 to 10.2% in Q3 2009, a 191% increase.

In Florida, this same variable increased from 5.1% in Q3 2007 to 12.4% in Q3 2009, a 143% increase.

During the same period, the United States experienced a 68% increase, from 4.0% in Q3 2007 to 6.6% in Q3 2009.

“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,” said Ezra Becker, director of consulting and strategy in TransUnion’s financial services business unit.

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