Skipping Mortgage to Pay Cards

To heck with the house, I need that credit card

More consumers are choosing to pay credit cards rather than their mortgage

CHICAGO (MarketWatch) — 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.

In an unprecedented shift, 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.

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“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 — with such debt dropping about $1.7 billion to $864.4 billion, according to the Federal Reserve on Friday. See story on how, overall, consumers’ debt load increased in January.

But a small slice of those consumers are paying down credit cards to the detriment of their mortgage loan. The number of consumers delinquent on their mortgages but current on their credit cards rose to 6.6% in the third quarter of 2009 from 4.3% in the first quarter of 2008, according to a TransUnion study of 27 million anonymous consumer records pulled randomly from its database. Meanwhile, the portion of those who fell behind on credit-card payments but paid their mortgage dropped to 3.6% from 4.1%.

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 shot up to 29% in the third quarter of 2009 from 19.1% in the fourth quarter of 2007, according to TransUnion. And in that low-credit-score group, consumers falling behind on credit cards but keeping pace with mortgage payments declined to 14.5% in 2009 from 18.1% 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% of consumers with FICO scores between 760 and 850 fell into arrears on real-estate loans, versus 0.1% 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 likely to fall behind 90 days, according to FICO.

continues … More people skipping mortgage to pay credit cards – MarketWatch.

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