TransUnion Sees More People Paying Plastic Before Property
More borrowers than ever before are choosing to pay down credit card debt over making mortgage payments. The share of borrowers who are delinquent on their mortgages but current on their credit cards rose to 6.6% as of Q309 (from 4.3% in Q108), according to national credit bureau TransUnion. At the same time, the share of borrowers that are delinquent on credit cards but current on their mortgages slipped to 3.6% from 4.1%. This switch first appeared in early 2008, when TransUnion reported the share of borrowers current on credit cards and delinquent on mortgages surpassed the share of borrowers current on mortgage payments and behind on credit cards. Since then, the shift of borrower behavior in paying down debt is growing. "Conventional wisdom has always been that, when faced with a financial crisis, consumers will pay their secured obligations first, specifically their mortgages," said Sean Reardon, author of the TransUnion study on the changing payment hierarchy from Q208 through Q309. "[I]ncreasingly more consumers are paying their credit cards before making mortgage payments," Reardon added. "This analysis reaffirms the results of a previous TransUnion study that examined data between the third quarter of 2006 and the first quarter of 2008." The study, based on a database of 27m consumer credit records, found the magnitude of delinquency is significantly higher in the lowest credit scoring segment, opposed to delinquency in the total market. The payment priority shift to credit cards over mortgages is even more pronounced in sand states like California and Florida, which experienced a more severe housing bubble effect, TransUnion said. "The implosion of the mortgage industry over the last 24 months, the resetting of adjustable-rate mortgages and the weak job market have all come together to redefine how consumers are managing their finances and meeting (or not meeting) their credit obligations," said Ezra Becker, director of consulting and strategy in the TransUnion financial services business unit. Becker added: "The financial services industry must recognize and adjust to the payment hierarchy shift with judicious modifications to business models, new assessments of specific areas of risk, and by strategic revisions to acquisition and account management strategies." Another national credit bureau, Equifax, recently released analysis that indicates home equity lines of credit (HELOCs) represent a significant portion of borrowers’ revolving debt and, thus, a huge driver of default. TransUnion saw mortgage loan delinquency rise for the 11th straight quarter in Q309. Based on credit performance of 27m consumers, however, mortgage delinquencies of 60 or more days should drop nearly 3% by year-end 2010 to 6.39%, from an expected 6.56% at year-end 2009. Write to Diana Golobay.