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