More consumers pay credit card, but not mortgage

CHICAGO - U.S. consumers are starting to look like a frugal, debt-fearing lot as they pay down billions of dollars in credit-card obligations. But an alarming trend is emerging: A small but growing number of people are skipping mortgage payments in favor of paying their credit-card bills.

In an unprecedented shift, for some consumers having a credit card in good standing appears to have taken priority over having a roof over one's head, experts said.

"This is not a carefree or nonchalant decision," said Ezra Becker, director of consulting and strategy at TransUnion, the credit-tracking firm. "But it really is a clear illustration of the impact this recession has had on consumer preferences and behavior."

While overall consumer debt rose unexpectedly in January, consumers continued to pay off their credit cards that month - a record 16th straight month of lower credit-card debt - with such debt dropping about $1.7 billion to $864.4 billion, according to the Federal Reserve on Friday.

But a small slice of those consumers are paying down credit cards to the detriment of their mortgage loan. The number of consumers delinquent on their mortgages but current on their credit cards rose to 6.6 percent in the third quarter of 2009 from 4.3 percent in the first quarter of 2008, according to a TransUnion study of 27 million anonymous consumer records pulled randomly from its database. Meanwhile, the portion of those who fell behind on credit-card payments but paid their mortgage dropped to 3.6 percent from 4.1 percent.

TransUnion calls it the new "payment hierarchy" and first began noticing the shift in the fourth quarter of 2007. Experts thought the pattern would reverse itself once the worst of the recession passed, but TransUnion's latest study confirms that the new behavior is becoming more prevalent and stretches across all income groups.

The trend is more common among consumers with the lowest credit scores. The percentage of consumers with low scores who paid credit cards rather than home loans shot up to 29 percent in the third quarter of 2009 from 19.1 percent in the fourth quarter of 2007, according to TransUnion. And in that low-credit-score group, consumers falling behind on credit cards but keeping pace with mortgage payments declined to 14.5 percent in 2009 from 18.1 percent in the first quarter of 2008.

But mortgage-payment problems are moving up the credit-score ladder, according to FICO, the credit-score company. A recent FICO Score Trends report found that mortgage-default risk for consumers with high scores now exceeds their credit-card-default risk, "reversing a long historic trend."

In 2009, 0.3 percent of consumers with FICO scores between 760 and 850 fell into arrears on real-estate loans, versus 0.1 percent who did on credit cards.

In 2009, credit-card accounts were 1.6 times more likely to become 90 days late than were mortgages, a steep drop from 2005 when credit-card accounts were more than three times likely to fall behind 90 days, according to FICO.

While the numbers are small, the trend is disturbing, said Mark Greene, chief executive of FICO. "We're identifying lending-industry situations in FICO Score Trends that, to our knowledge, have never been seen before," he said in the report. "Economic stability is creating unknown risk in lenders' credit portfolios as well as counter-intuitive trends in consumer behavior."

You can blame those trends on a deep economic slump that's pulled the rug out from under long-held jobs, home values and retirement accounts. And, in the wake of a new credit-card law as banks tighten the screws on who gets credit and how much they get, some consumers are getting more protective of their credit cards. Plus, with the unemployment rate at a hefty 9.7 percent, people are worried about losing their job and perhaps needing their plastic to get by.

On top of that, home values have taken a beating, and many homeowners now find themselves underwater on their home loans, meaning the mortgage outweighs the current value of the real estate. For some, holding on to the undervalued house suddenly doesn't look like the smartest thing to do now.

"The combination of all these things makes some consumers think that paying money on the mortgage might not be in their best interest relative to the credit card," said TransUnion's Becker. "If I'm unemployed, I need to rely on the credit cards to get me through it till I get a job."

Another thing to consider, Becker said, is that you get kicked off your credit card far faster than you get kicked out of your home. It could take a year or longer to get thrown out on the streets; a bank can pull a credit card in default in 90 days, or even less if payments are habitually late.

The mortgage mess isn't done yet, even as the economy hobbles its way into a recovery. Rachel Bell, FICO's senior director of analytics, said she expects to see more consumers with high scores go into the home-foreclosure process, particularly on their second homes, as interest rates rise on adjustable-rate mortgages.

"If they have second homes, they're more willing to walk away," she said. "But even on first mortgages, there are these strategic default decisions we're seeing where consumers are willing to walk away from a home. If they're under water financially, they don't see the benefit of holding on to it."

Remember this, too: Credit performance generally lags economic performance. If the job market doesn't improve soon and in a big way, the fallout will continue. Though the U.S. jobless rate held steady at 9.7 percent in February, the portion of workers who classify themselves as underemployed is inching up, according to a Gallup survey.

Some 30 million Americans, or 19.8 percent of the work force, say they aren't working to their full potential because they are either unemployed or working part time but wanting full-time jobs, according to Gallup.

"Despite indications that the U.S. economy may be recovering, underemployment remains high," Gallup said in its study.

Here's the good news: This shift in payment hierarchy isn't expected to turn into another "new normal." It's simply the effect of the cause of high unemployment and depreciating housing values.

"When those two factors abate," Becker said, "we will almost certainly see a return to the traditional payment-default hierarchy."

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