Study reveals consumers paying credit cards over mortgages. What this really means.

As soon as TransUnion released its research, news headlines announcing the results multiplied like foreclosures in Detroit. The first headline I saw read: “Consumers Paying Credit Card Over Mortgage”.  I was attracted to the story not because it was shocking, but because it confirmed what I already knew would happen.  Let me explain.  Imagine the following predicament:

You have been unemployed for about a year and a half now.  When laid off, you were lucky enough to receive a severance package for four months, but that has run out now.  You have exhausted all of your unemployment benefits too.  Likewise, you have depleted your life savings.  Fortunately, you have some income from odd jobs here and there, but it is just not enough to cover all of your expenses. 

You have tried everything to get back on your feet, but no permanent opportunities have materialized.  Having reached the end of your financial tether, you even tried to get a loan modification through President Obama’s plan, but the bank that owns your house says you have to be delinquent at least three months before you qualify.  At this point, you decide to stop paying your $1,250 mortgage and to pay for food, electricity, water, gas, and yes, the minimum balance on your credit cards, which allow you to float some nominal, but important expenses.  At least you can live comfortably before the bank forecloses on your house. Meanwhile, you hope that a miracle will save you from losing your home.

The previous scenario describes the dilemma facing millions of Americans.  The longer this recession lasts, the more Americans will become desperate.  Consequently, their actions will change.  At some weary point of financial decline, their priorities, sense of responsibility, and moral obligation will corrode.  TransUnion’s research does nothing more than confirm this gloomy reality.    

Furthermore, people respond to incentives.  This is one of the ten principles of economics upon which the great majority of academicians agree.  The change in payment hierarchy is a perfect example of this principal.

For instance, because foreclosures are so widespread, social norms have changed.  The shame once associated with foreclosure is no longer as strong a factor in determining payment hierarchy. This phenomenon can be attributed, in part, to the unintended consequences of public policies such as Mr. Obama’s loan remodification program, which has given homeowners the incentive to stop paying their mortgages.

Also, the “normal” cost-benefit calculation will only become more warped as The Credit CARD Act becomes law on Feb. 22.  For example, a consumer may behave based on the belief that a delinquent mortgage will not adversely affect his or her credit card accounts because universal default will no longer be legal.  Therefore, the incentive to pay the mortgage diminishes. 

In short, the value of TransUnion’s research is not the obvious conclusion suggested in the news headlines; instead, it is the indication that very soon, millions of unemployed Americans will simultaneously reach their financial tipping point, the time when they have run out of options. 

[ Read TransUnion's official press release for the study. ]

Comments

[Kevin D. Johnson]

Tony, I think that what you are getting at is the fact that so many people have trouble with downgrading their lifestyle. Difficult times require difficult decisions.

[tony]

always had a job never let the economy deter me. My income is small and I have bills like everybody but they get paid. I wont buy new clothes go out to eat movies etc etc but I will pay my bills. Most people will continue to enjoy what I mentioned in lu of paying bills. They will pay their car before paying their mortgage or credit car debt because a car is a means of enjoyment and they will never give it up. a bus will take them to work but the car is pleasure. This is why people suffer in this bad economy

[Kevin D. Johnson]

Way to go, Jeffery. Reducing your debt is never a bad things.

[Jeffrey Johnson]

I also thank it due to people learning credit cards are snakes as Dave Ramsey says. People getting few rate increase notices and credit limit reductions for same card every few months probably letting people know cash is king. I am paying off slowly all my old debts from college and know I never use credit again. Nothing like every few months killing another debt and seeing you monthly income after pay everything increase.