A trend that started four years ago of borrowers giving more priority to credit card payments than home loan payments is continuing to abate.
In early 2008, statistical data indicated that for the first time, the share of borrowers who were current on their credit cards but delinquent on their mortgages was greater than the percentage of consumers who were up-to-date on the home loans but past-due on their credit cards. At that point, 4.3 percent of people who were delinquent on their home loans were current on their revolving debt.
The tendency towards giving priority to unsecured revolving payments continued to worsen until the third quarter of 2010, when 7.4 percent of delinquent mortgage borrowers were current on their credit cards. The preference of paying credit cards first was most pronounced among consumers with the lowest credit scores.
But by the fourth-quarter 2010, the share dropped to 7.24 percent, according to TransUnion, which reported the data a year ago.
At the time, an executive for the Chicago-based firm suggested that the fourth-quarter 2010 decline might have been “a sign that the divergence in the payment hierarchy has peaked.”
The prediction was right.
In a report released Thursday, TransUnion said that as of the fourth quarter of last year, the rate of delinquent mortgage borrowers who were current on their credit cards had fallen further — to 6.9 percent as of the final quarter of last year.
The findings were based on a sample of around 4 million consumers that had at least one auto loan, one credit card and one mortgage open.
Today’s report also indicated that borrowers who were delinquent on there credit cards but current on their home loans finished last year to 2.7 percent, down from 3.0 percent at the end of 2010. The rate had been up to 4.1 percent in the first-quarter 2008.
“Though the percentage of consumers delinquent on mortgages and current on credit cards has dropped in the last year, the payment hierarchy shift is as strong as it was one year ago, with consumers opting to pay their credit cards before their mortgage payments,” said the study’s co-author Matt Komos. “We established in our earlier study that this payment hierarchy reversal was chiefly the result of two factors: the decline in house prices and high and persistent unemployment levels.”
Komos explained that a shift towards prioritizing mortgage payments can only occur when the housing market stabilizes and begins to recover and when unemployment improves.
The latest data showed that auto loan payments take priority over both revolving debt and mortgage debt, with 39 percent of past-due mortgage borrowers being current on their auto loans and credit cards versus 9.5 percent of delinquent auto loan borrowers who were current on credit cards and home loans.
The preference towards paying car loans first was attributed to the need for transportation in a job search, the consequence of a repossession, which outweighs the consequences of missing a credit card payment, and the higher equity in their cars compared to their homes — especially given the increased frequency of negative equity.
The negative-equity factor was most evident in Florida, where half of delinquent mortgage borrowers were current on car loans and credit cards, and Michigan, where the ratio was 39 percent.
