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March 1st, 2010

Update1: What’s Your Top Priority — Credit Card or Mortgage?

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Update1 (03/01/10):

This new and alarming trend of borrowers prioritizing their credit card payments before their mortgage payments is even occurring amongst borrowers with high credit scores, according to FICO:

“We’re identifying lending industry situations in FICO Score Trends that to our knowledge have never been seen before,” said Dr. Mark Greene, CEO of FICO, in a statement. “Economic instability is creating unknown risk in lenders’ credit portfolios as well as counter-intuitive trends in consumer behavior.”

The shift to a consumer preference to stay current on unsecured debt, as opposed to secured debt, began last year. In 2009, 0.3 percent of consumers with FICO scores between 760-789 defaulted on real estate loans, compared to 0.1 percent who defaulted on credit cards. In 2005, credit card delinquency risk was three times greater than today. In 2008, the lower to credit cards being just 1.6 times more likely to become 90 days delinquent than were mortgage loans.

These findings directly coincide with a recent study by TransUnion (see below).

What’s behind the trend? “The stigma surrounding foreclosures has lightened appreciably,” said HSH VP Keith Gumbinger. “There are fewer penalties and far more opportunities to avoid foreclosure now than there have ever been.”

Original post (published on 02/03/10):

“You cannot buy groceries with your house.”
-Sean Reardon (TransUnion)

Assuming you have debt in both a credit card and a mortgage, which debt would you pay down first? In this post-recession society, more and more cash-strapped consumers are having to prioritize their debt payments. For most, it comes down to “what can I do without this month?”

According to a recent study by TransUnion, more Americans are choosing to pay off their credit cards before they make their mortgage payments — a trend that has really only recently begun.

What’s behind the trend? “The stigma surrounding foreclosures has lightened appreciably,” said HSH VP Keith Gumbinger. “There are fewer penalties and far more opportunities to avoid foreclosure now than there have ever been.”

Chalk this growing trend up as another unintended consequence of the federal home preservation efforts. Opportunities abound for borrowers who can’t (or don’t) make their mortgage payments on time: there are loan mods, refis, foreclosure moratoriums, forbearance programs, and the list goes on. We’ve heard numerous stories of borrowers who have been able to live “rent free” in their foreclosed property for months before being evicted.

Strategic defaults are a perfect example of how the moral dilemma of paying your mortgage debt has begun to fade.

We want to hear from readers — have your ‘paying down debt’ priorities changed over the last year? Which goes first?

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6 Responses to “Update1: What’s Your Top Priority — Credit Card or Mortgage?”

  1. Lucia Says: February 4th, 2010 at 3:43 pm

    Our mortgage payment is lower than local rents, so we chose to keep this roof over our heads. Besides, our loan could be paid off within 7 years at this point. I understand why folks would opt to pay off their credit cards, since using them for necessities is common during recessions, and it’s much easier to pay them than to make huge mortgage payments.

  2. Tim Manni Says: February 4th, 2010 at 4:50 pm

    Lucia,

    That seems to be the consensus. Since sending in a partial payment is as good as throwing your money away if you can never make full payments anyway, consumers have to be thinking “what do I need right now, today?”

    Great hearing from you. Anytime you have an idea for a post please don’t hesitate to let me know.

    Thanks,
    Tim

  3. Mitch Says: February 7th, 2010 at 5:17 pm

    I’m kind of stunned by that stat myself Tim. I’d have thought it best to keep paying on the mortgage and forego the credit cards. Keeping a roof over one’s head is imminently more important, plus if I’m going to end up with a bad credit report anyway at least I know no one’s going to be able to take my home from me.

  4. Market Trends by HSH Associates » Blog Archive » Mortgage Rates … | Refinance Mortgage Ideas Says: February 8th, 2010 at 8:43 am

    [...] those to figures pressed the nation’s rate of savings back upward to 4.8%. Americans (at least those who can) are clearly banking as much as they can right [...]

  5. Tim Manni Says: February 8th, 2010 at 11:59 am

    Mitch,

    Thanks for commenting. I think a lot of people share that sentiment. Yet, I guess you’re faced with the question, do I go food shopping for the kids, or put that money towards the mortgage? It’s a very personalized decision I guess. I mean obviously, the massive increase in foreclosures have caused these numbers to rise. I guess it’s all part of the foreclosure process — prioritizing other bills before the house.

    Good hearing from you,
    Tim

  6. Dee Says: March 2nd, 2010 at 10:10 am

    After I found a company that showed me how to payoff my mortgage in 3 to 6 months not years. I don’t worry about paying a mortgage every month. I take the money I was paying in mortgage now and use it to payoff my credit cards. The company gives you free ebooks,videos and a webinar to help you learn and answer your questions about the process of paying off your mortgage in 3 to 6 months.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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