U.S. consumers are starting to look like a frugal, debt-fearing lot as they pay down billions of dollars in credit-card obligations. But an alarming trend is emerging: A small but growing number of people are skipping mortgage payments in favor of paying their credit-card bills.
For some consumers, having a credit card in good standing appears to have taken priority over having a roof over one's head, experts said.
“This is not a carefree or nonchalant decision,” said Ezra Becker, director of consulting and strategy at TransUnion, the credit-tracking firm. “But it really is a clear illustration of the impact this recession has had on consumer preferences and behavior.”
While overall consumer debt rose unexpectedly in January, consumers continued to pay off their credit cards that month — a record 16th straight month of lower credit-card debt. Such debt dropped about $1.7 billion to $864.4 billion, according to the Federal Reserve.
But a small percentage of those consumers are paying down credit cards to the detriment of their mortgage loans. The number of consumers delinquent on their mortgages but current on their credit cards rose to 6.6 percent in the third quarter of 2009 from 4.3 percent in the first quarter of 2008, according to a TransUnion study.
The company randomly pulled 27 million anonymous consumer records from its database. Meanwhile, the portion of those who fell behind on credit-card payments but paid their mortgage dropped to 3.6 percent from 4.1 percent.
TransUnion calls it the new “payment hierarchy” and first began noticing the shift in the fourth quarter of 2007.
Experts thought the pattern would reverse itself once the worst of the recession passed, but TransUnion's latest study confirms that the new behavior is becoming more prevalent and stretches across all income groups.
The trend is more common among consumers with the lowest credit scores. The percentage of consumers with low scores who paid credit cards rather than home loans jumped to 29 percent in the third quarter of 2009 from 19.1 percent in the fourth quarter of 2007, according to TransUnion.
In that low-credit-score group, consumers falling behind on credit cards but keeping pace with mortgage payments declined to 14.5 percent in 2009 from 18.1 percent in the first quarter of 2008.
But mortgage-payment problems are moving up the credit-score ladder, according to FICO, the credit-score company. A recent FICO Score Trends report found that mortgage-default risk for consumers with high scores now exceeds their credit-card-default risk, “reversing a long historic trend.”
In 2009, 0.3 percent of consumers with FICO scores between 760 and 850 fell into arrears on real-estate loans, versus 0.1 percent who did on credit cards.
In 2009, credit-card accounts were 1.6 times more likely to become 90 days late than were mortgages, a steep drop from 2005 when credit-card accounts were more than three times more likely to fall behind 90 days, according to FICO.
While the numbers are small, the trend is disturbing, said Mark Greene, chief executive of FICO.
You can blame those trends on a deep economic slump that's pulled the rug out from under long-held jobs, home values and retirement accounts. And in the wake of a new credit-card law, which has prompted banks to be more selective in who gets credit and how much they get, some consumers are becoming more protective of their credit cards.
Also, people are worried about losing their jobs and perhaps needing their plastic to get by.
On top of that, home values have taken a beating, and many homeowners now find themselves underwater on their home loans, meaning the mortgage outweighs the current value of the real estate. For some, holding on to the undervalued house suddenly doesn't look like the smartest thing to do.
“The combination of all these things makes some consumers think that paying money on the mortgage might not be in their best interest relative to the credit card,” said TransUnion's Becker. “If I'm unemployed, I need to rely on the credit cards to get me through it till I get a job.”
Another thing to consider, Becker said, is that a person could lose a credit card faster than he or she would get kicked out of a home. Eviction can take a year or longer; a bank can pull a credit card in default in 90 days, or even less if payments are habitually late.
Nevertheless, this shift in payment hierarchy isn't expected to turn into another “new normal.” It's simply the effect of the cause of high unemployment and depreciating housing values.
“When those two factors abate,” Becker said, “we will almost certainly see a return to the traditional payment-default hierarchy.”
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