Statistics show that most consumers are choosing to make their credit card payments over their mortgage payments. Even after the recession is well and truly over, this trend has not changed, which could be a worrying sign for the housing market.
Shift in Payment Patterns
TransUnion recently surveyed 27 million consumer records, of which 4.3% people had been paying their credit card bills even when they were defaulting on mortgage payment in 2008. This figure increased to 6.6% in 2009. During the same period, the percentage of people who were paying their mortgage debts, but not their credit card payments, decreased from 4.1% to 3.6%.
It is clear that the new trend is to pay credit card debt before mortgage debt. Earlier, this used to happen only among people with a bad credit history, but the same thing is now being seen across all credit score and income profiles.
Some analysts say that this trend is not surprising because consumers always give up mortgage payments first during times of financial crisis. When their financial position is sound, people usually give the highest priority to mortgage debt payments, followed by car loan payments and credit card payments.
During the economic recession, many people lost their jobs while others had to deal with low cash inflows. They had to make a ‘payment hierarchy’ and prioritize their payments. The surprising part is that mortgage payments have not picked up even after the economy has staged a recovery.
Reasons for Low Mortgage Payments
There are many reasons why consumers choose to pay credit card bills rather than their mortgage debt. One reason can be that mortgage debts are usually huge, which people find difficult to repay. In other words, a mortgage may seem like an almost insurmountable debt when the times are bad. Instead of putting more money into a lost cause, people prefer keeping their lines of credit alive.
It is much more difficult to get a credit card or home equity loan now and consumers realize the importance of keeping their existing credit options open. Foreclosure is a long process, but credit cards can be canceled immediately and interest rates can increase with just one missed payment. The collection calls from card issuers can also be very stressful for some people. Moreover, the need to pay for everyday expenses using a credit card has increased because of unemployment.
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