Certain effects of the economic downturn have begun to ease, but one recession-hatched trend persists: Cash-strapped consumers continue to show a preference for paying their credit card bills over their mortgages, according to new data TransUnion LLC released Tuesday.
A study the Chicago-based credit bureau conducted recently involving 27 million anonymous consumer credit records shows that, when consumers last year were unable to meet all their financial obligations, they were more likely to fall behind on their mortgages than on their credit cards.
Consumers’ financial situations may be improving, but their bill-payment hierarchy continues to buck pre-recession patterns, the data suggest.
In previous decades, consumers were more likely to default on their credit cards before letting their mortgage payments fall behind, Sean Reardon, a consultant with TransUnion’s analytics and decision services group, tells PaymentsSource. “When forced to prioritize, consumers have always ranked their securitized assets, such as their home or car payment, first.”
But a reversal of the traditional payment hierarchy began to surface during the first quarter of 2008, Reardon says. For the first time, the percentage of consumers who were keeping up with their credit card payments while delinquent on their mortgage payments surpassed the percentage of consumers who were current on their mortgage payments and behind on their credit card accounts.
When the payment hierarchy flip-flopped approximately three years ago, “most analysts” believed that trend would end once the recession concluded. But that was not the case, Reardon says.
In fact, the reversal of the traditional pattern became more widespread, with the percentage of consumers delinquent on their mortgages and current on their credit cards rising to as high 7.4% during the third quarter of 2010, up 310 basis points from 4.3% during the first quarter of 2008, according to TransUnion.
“The reversal of the traditional payment hierarchy was driven by a perfect storm of falling home prices and the glut of real estate in the market, combined with rising unemployment," Reardon says. Those forces caused “a kind of economic tsunami” that prompted changes in how consumers viewed their debt obligations, he notes.
But TransUnion data from late 2010 suggest the trend reversal may be beginning to shift back toward traditional patterns.
During the fourth quarter, the percentage of consumers who were behind on their mortgage payments but current on their credit card accounts dropped 16 basis points to 7.24%. Meanwhile, the percentage of consumers who were delinquent on their credit card accounts and current on their mortgages fell to 3.03%, its lowest level ever and down 107 basis points from 4.1% during the first quarter of 2008.
The recent decline in consumers delinquent on their mortgages yet current on their credit card accounts “may be a sign that the divergence in the payment hierarchy has peaked,” Reardon says.
