More Consumers Make Payments on Credit Cards Before Mortgages

February 22, 2010

A study finds the new payment hierarchy, where consumers pay their credit cards prior to their mortgages, is occurring more readily.

Beginning in the first quarter 2008, the percentage of consumers current on credit cards but delinquent on mortgages surpassed the percentage of consumers current on their mortgages and delinquent on credit cards, according to a new study developed by TransUnion. This "flip" is representative of the change in the conventional wisdom around the payment hierarchy, or which debt obligations consumers would choose to pay first.

The latest study, conducted on consumers with at least one credit card and one mortgage, examined 30-day credit card and mortgage delinquency data between the second quarter of 2008 (Q2/2008) and the third quarter of 2009 (Q3/2009). Although many industry analysts believed a reversion to the conventional payment hierarchy would ensue once we had passed through the worst of the recession, that has not been the case.

To the contrary, the study found the hierarchy reversal has become even more widespread, with the percentage of consumers who are delinquent on their mortgages and current on their credit cards rising to 6.6 percent in Q3/2009, up from 4.3 percent in Q1/2008. Conversely, the percentage of consumers who are delinquent on their credit cards and current on their mortgages has decreased to 3.6 percent in Q3/2009 from 4.1 percent in Q1/2008.

According to the study, payment hierarchy shifts are even more pronounced in states such as California and Florida, which experienced a more severe housing bubble effect. In California, the percentage of consumers delinquent on their mortgages but current on their credit cards increased from 3.5 percent in Q3/2007 to 10.2 percent in Q3/2009 (a 191 percent increase). In Florida, this same variable increased from 5.1 percent in Q3/2007 to 12.4 percent in Q3/2009 (a 143 percent increase). In this same timeframe, the United States experienced a 68 percent increase (from 4.0 percent in Q3/2007 to 6.6 percent in Q3/2009).

In contrast, the number of California consumers delinquent on their credit cards but current on their mortgages declined from 3.3 percent in Q3/2007 to 2.7 percent in Q3/2009. In Florida, this variable declined from 5.0 percent in Q3/2007 to 3.9 percent in Q3/2009.

"The implosion of the mortgage industry over the last 24 months, the resetting of adjustable-rate mortgages and the weak job market have all come together to redefine how consumers are managing their finances and meeting (or not meeting) their credit obligations," said Ezra Becker, director of consulting and strategy in TransUnion's financial services business unit. "The insight gained through this analysis reveals a lot about changing consumer preferences.”

For more information, visit the TransUnion Web site.