Data shows this phenomenon was even more pronounced at the end of 2010, long after industry experts had expected patterns to return to normal. TransUnion said that 7.24% of American consumers who had at least one credit card and a mortgage were thirty days late on the mortgage payments but current on their credit card payments at the end of 2010. In the first quarter of 2008, when the change was first seen on a national basis, only 4.3% made credit card payments first.
"This goes against conventional wisdom and that has always been that, when faced with a financial crisis, consumers will pay their secured obligations first, specifically their mortgages," Sean Reardon, the author of the study and a consultant in TransUnion's analytics and decisioning services business unit, said in an interview. This shift in traditional payment trends reflects the spike in unemployment and the simultaneously sharp decline in home values across the country.
"As long as housing problems persist and unemployment is high, things are likely to stay flipped," said Reardon.
The states where this situation is most pronounced are Florida and California, the two hit hardest by the housing crisis. Both these states noticed this phenomenon earlier than the rest of the country, during the third quarter of 2007.
The factors influencing this trend are many. For one, it is usually far easier to pay a credit card bill than a mortgage payment. If consumers don't have enough to pay the full mortgage payment, they will likely put what little money they have towards paying the lower credit card bill in full. The old story of the squeaky wheel getting the grease may come into play here as well. Some feel that the constant harassment which can occur regarding credit card debt may influence consumers to pay that debt off just to get the bill collectors off their back.
Tighter banking regulations are making it difficult for banks to manage the accounts of risky customers, and they will now shut a card down if a consumer misses one or two payments. After six months, the account is written off as uncollectable. By contrast, it can take a year or more after the first missed mortgage payment before a house is foreclosed. Consumers feel that gives them more time to try to solve their financial problems. Therefore, consumers will juggle their credit card and mortgage payments in order to attend to daily necessities until eventually they run out of time. Having still not recovered financially, they cannot come up with enough money to stop the house from going into foreclosure at that point.
Also, consumers who are having financial difficulties will often use credit cards to pay for utilities, buy food or for emergencies. You can't buy those with a house.
The big question is whether or not credit cards will remain a higher priority for cash strapped consumers. Of consumers who defaulted in the last three months of 2010, 52% defaulted on their mortgages but kept their credit card payments current, while 22% defaulted on credit card payments but kept their mortgages current.
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