June 6th, 2014
Consumers are Prioritizing Mortgages over Credit Cards
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For the first time since the housing crisis, consumers are now more likely to miss payments on their credit cards than their mortgage.
This represents a return to normalcy. Mortgage lenders have long relied on the fact that, statistically, borrowers would rather miss a payment on their credit card debt than their home loan. This trend remained true until the 2006 housing bust, when borrowers began to fall delinquent on their mortgages at record numbers and mortgage delinquencies quickly surpassed credit card delinquencies.
What are the causes of this shift in priorities?
A recent study from TransUnion found a strong correlation between home values and mortgage repayment. In places where property values remained relatively stable, like Dallas, mortgage delinquencies followed suit. But in places where home values sank drastically, like Los Angeles, mortgage delinquencies rose in equal measure.
TransUnion researchers suggest that borrowers became more willing to default on their home loans because the decrease in property values had completely wiped out any equity in their property. This means that consumers’ houses were worth substantially less than the outstanding balance on their mortgages. No one enjoys paying more for something than it’s worth, so this factor encouraged borrowers to stop putting money towards what had become a less valuable asset.
Is this a beneficial way to make decisions about your finances? What does this kind of decision making actually do to your credit?
In the short term
Your mortgage delinquency may influence your day -to- day life very little. Depending on the state, foreclosure can take several years to complete. This means that you might be able to remain in your home without making payments for some time, and it could allow you to put the money you would be paying on your mortgage toward managing your other debts and obligations.
By contrast, if you fall delinquent on credit cards your lender could choose to block transactions on your account and send it to collections relatively quickly. If you’re struggling to make payments on your debt, a credit card in good standing can grant you much needed breathing room in your budgeting. Losing a card can immediately restrict your buying power, which is especially painful when your budget is already tight.
In the long term
A foreclosure tends to be considered more severe than a regular collections account or settled debt due to the sheer size of a home loan. Additionally, foreclosures may be listed on your credit report both as a court judgment against you and a notation on your mortgage account, so the hit to your credit resulting from a foreclosure could likely be more damaging than letting a credit card fall into collection. On top of the credit hit, when you lose your home to foreclosure you lose your home and the investment you put into it.
Both routes tend to result in delinquencies being listed on your report, but once a credit card account goes into collection it can continue to cause negative marks. For one, collections accounts can be resold by one collection agency to another, resulting in the account being listed again. The second listing may not harm your score as much as the first, but it certainly doesn’t help you. Once your account is in collection, the collection agency can choose to take you to court for your debt at any time. The resulting court judgment will add an additional derogatory mark to your history. Finally, you can find yourself going through this process with multiple credit cards, whereas you may only have one mortgage.
The best thing to do is avoid delinquency if at all possible.
Lenders may be willing to work with borrowers who have a positive history with them. If you’re having trouble making your payments, it could be helpful to contact your lender before you miss your first payment. Lenders want to protect their investments. They generally lose money in foreclosure and collections, so if they believe they can work with you to get most or all of the loan and interest back, they have an incentive to do so.
Especially if you’re experiencing a temporary financial hardship, there might be payment options available. Your lender may choose to lower your interest rate or minimum payment to make staying current more manageable. They may also be willing to grant a period of forbearance, a pause during which you are not required to make payments at all.
Obviously it’s best to avoid such a situation entirely, but when balancing your financial priorities, be sure to consider all your options and keep your credit health in mind.
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