A battle is brewing as consumer income continues to shrink…
Two industries feeling the fall out of the financial crisis are credit card companies and mortgage providers. Americans are carrying credit card debt of over $900 billion and defaulting at a rate of nearly 10%, while more and more homeowners are at the brink of foreclosure, with more expected in the coming year. According to the Federal Reserve, credit card debt has dropped for sixteen straight months by nearly $1.7 billion to less than $865 billion.
With consumers looking for ways to cut costs, mortgage and credit card companies are fighting for every penny. A surprising shift has been noted that began in the fourth quarter of 2007: a growing number of consumers are opting to pay their credit card bill and passing on their mortgage payment, choosing plastic to the detriment of the roof over their heads. The number of consumers who are delinquent on their mortgages but remain 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 randomly selected from its database, the number of consumers falling behind on their credit card payments but who continue to pay their mortgage fell from 4.1% to 3.6%.
The trend stretches across all income groups, but according to the TransUnion study it is more common for consumers with a low credit score. Consumers with the lower credit scores who let their mortgage payment slip while paying their credit card debt rose to 29% in the third quarter of 2009. Those who kept pace with their mortgage and fell behind on their credit cards declined from 18.1% in the first quarter of 2008 to 14.5% in 2009. “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.”
The two factors most responsible for the shift in payment priorities are high unemployment rates and depreciating housing values. Financial experts, however, do not see this as a permanent switch but expect the return of the traditional payment hierarchy when housing normalizes and employment rates stabilize.
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