A recent article (link no longer active) from US News & World Report shed light on an interesting phenomenon occurring in the world of personal finance–a noticable shift in U.S. consumer behavior that prioritizes credit card debt over mortgages.
The statistical shift is significant enough for people to take notice:
“…the percentage of Americans who were current on their credit cards but behind on their mortgage increased to 6.6 percent in the third quarter of 2009, up from 4.3 percent in the first quarter of 2008.”
Bankers are shaking in their boots:
“Before the housing crisis, bankers typically operated under the assumption that homeowners would do whatever possible to remain current on their mortgage–even if that meant falling behind on other bills…”
Not the case anymore. The article cites a number of reasons for this recent phenomenon; many are deeply rooted in some of the underlying causes of the recession:
- People don’t want to throw good money after bad, continuing to fund assets that are underwater, and were often purchased with little or no equity.
- Credit is being used to flexibly finance everyday expenses when there’s a cash shortage, something a house can’t do.
- For a home, the time between a late payment and final foreclosure can stretch out over more than a year, providing a much-needed stop to most families’ largest expense. On the other hand, falling behind on credit cards results in a quick lock or closure of the account.
That’s a good start, but I wanted to dig deeper. I have a few more potential reasons for this phenomenon, as well as some curious observations about the whole thing:
- Foreclosure is no longer shameful. It used to be that you were looked down on if you somehow overreached in your home purchase and ended up losing everything. Simply running a mortgage calculator is a great start, but is no longer sufficient on its own as a way of determining affordability. Now, I bet every one of us knows at least one person going through the foreclosure experience. It makes it very real and very serious, but it also brings a spirit of camaraderie to people that are going through it. And from my own experience, many even wear it as a “badge of honor.”
- Banks are being demonized. Political discussion aside, it’s pretty clear that many people hold the banks at least as equally at fault as the homeowners who overreached. The result is a “stick it to them” attitude, whereby people are simply sick of not only throwing in money to a dead asset, but doing so to a financial institution that they despise.
- Credit cards are giving people a sense of self-worth, where there is none. Many people still find comfort and a sense of accomplishment in being able to buy things, even if that’s no longer luxuries, but only groceries for the family. When it seems like everything else is crumbling down, this can feel so uplifting and even powerful. It’s very easy to fall into the trap of swiping a credit card and getting that ego boost.
- People still view credit cards as necessities. Even the article I mentioned has this view (or more specifically–a quote), but I believe that’s not the case. Many personal finance bloggers have shown easy work-arounds to the most commonly cited “needs” for credit cards. Many have also closed all of their credit accounts for good. Unfortunately, when the public still views plastic as a must-have, they will be more willing to do everything to keep it.
- It’s clear that people still look out for #1. We can talk about ethics, “doing the right thing,” the public good, and all of that all day long. But it’s clear to me that when push comes to shove, in times of real financial stress or desperation, people are going to look out for no one else but #1. Given a choice between two or more financial options, they will pick the one that benefits them the most, even if it means screwing someone else. Now, that really scares bankers. And it’s unfortunate for those of us who will be looking to buy in the next few years…but it’s only human nature.
What would I do in that situation? It’s tough to say–given my thoughts on the subject, I would probably try to keep the house first and worry about rebuilding my credit later. But there are so many nuances to each situation…
Balance, one of my favorite financial principles, hardly applies in this case–you can’t really pay half of your mortgage and credit card bills if that’s all the money you have.
What do you think? Do you see other potential reasons for this trend? Do you know someone who’s had to face the choice? What do you think you would do given an ultimatum between one or the other?
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Fiscal Fizzle 
This is absolutely brilliant–“Credit cards are giving people a sense of self-worth, where there is none. Many people still find comfort and a sense of accomplishment in being able to buy things, even if that’s no longer luxuries, but only groceries for the family. When it seems like everything else is crumbling down, this can feel so uplifting and even powerful. It’s very easy to fall into the trap of swiping a credit card and getting that ego boost.”
That is such a powerful message that I wish more folks would understand.
Yes, ditto! And thank you for the “brilliant” comment. I think my self-worth just shot up a few points!! 🙂
It’s pretty sad if people are finding self-worth with swiping a credit card. If they’re buying groceries on a credit card, then they either have an income problem or a budgeting problem. If it’s an income problem, they need to put self-worth aside and grab a couple of meaningless, temporary jobs to cover the temporary shortfall in income.
.-= Erik´s last post: Personal Finance Round-Up: Have a Happy Valentine’s Day on a Budget =-.
Sad, but unfortunately, I don’t doubt that it’s happening. I think people would rather “get the goods,” so to speak, without facing the reality of what’s happening.
I would also put ‘collections pressure’ on the list of reasons that would make people pay their credit card over their mortgage. Unsecured creditors make a living by being IN YOUR FACE if you mess up because they know that’s their only way to collect.
I find this statistic alarming. We need more financial education giving people the tools to understand just what they’re choosing!
.-= Deacon Bradley´s last post: Big Screens and Benjamins; How the Rich Live =-.
Awesome point, Deacon! On the other hand, foreclosures have just sort of become “run of the mill” where all you really get are slow-to-come letters from the courts and you can pretty much ignore the situation altogether.
I think you’re right on all counts. People are most interested in a certain lifestyle; for some that’s a house, for others it’s the ability to spend money at will. Credit cards facilitate that spending, a house constricts it. For some it’s probably choosing between the lesser of the two evils. The only problem with that thinking is that if you fall behind on your mortgage, there’s a better than even chance your credit cards will be frozen, or at least the rates increased a bunch.
The mortgage bankers and policy makers failed to see the shift in the wind on this. Mortgage risk evaluation and even credit scores were always skewed in favor of the belief that people will pay their mortgages, come what may. No one saw the shift, and that’s the ah-ha part of the mortgage meltdown. Those who were in the business for a long time and were honest, saw this coming. It really wasn’t a surprise at all.
.-= Kevin@OutOfYourRut´s last post: Blue Collar Jobs Can’t be Moved Offshore =-.
“Credit cards facilitate that spending, a house constricts it.” Interesting comment (since somewhat ironically, most people feel a house will bring them more freedom).
While unheard of just a few years ago, many well-to-do and even able-to-pay homeowners are just up and walking away. There are actually prominent economists and professors advocating this. The premise is that they will never (or at least no time soon) regain the equity in their homes.
Case in point. Family w $250K annual income. Bought an $800K house in 2005 that’s now worth $450K. They had an interest only mortgage. They’re basically $350K in the hole. They are being advised to just walk away. Take the hit, buy a new home in several years.
Personally, I think I’d be ashamed to do so. It is your home after all and there is a contractual commitment you’re obligated to, but then again, I’ve never been in the hole $350K.
No amount of tinkering the administration is doing can stem the tide. Probably should have let the market shake out immediately rather than prolong this pain. We’ll probably see these “strategic defaults” continue for years.
That economists advocate it is just scary…knowing that it will only propel the cycle forward.
I’m kind of with you–I used to think it was unethical to walk away from a mortgage, but I’ve never been in that situation. So I have no idea what I would do…
For those desperate for solutions, this may seem like the only way out.
That is unfortunate that “Forclosure is no longer shameful”. I can recall about 4 of my friend’s who walked away from their houses. They keep asking my husband how he owns his home and doesn’t struggle or need to work overtime. His answer, “I only bought as much house as I needed”. Many of these friends bought Huge houses. But I hold the banks and loan agents at fault, too. *shame*
Great post!
.-= Money Funk´s last post: How to Increase Your Alexa Ranking =-.
That’s absolutely brilliant, and I applaud you guys for staying true to your own finances and not worrying about keeping up with everyone else!
I hear you about the banks…although there is definitely plenty of finger pointing to do, and it doesn’t stop at the bankers.
We have like $300 on a credit card and a car loan of around $4000. I can’t wait to get those paid off! After that, we will be debt free. I’ll have to admit, I do have a hard time making extra principal payments on my mortgage!
.-= Mrs. Money´s last post: How Does Redbox Make Money? =-.
Sounds like you’re really close! We have quite a bit more to go with our car payments and student loans. But no mortgage as of yet…
These numbers are scary. Unfortunately people are living in a dream world. Keeping the credit card active only prolongs the amount of time livng the lie.
I guess another thought may be “it’s going to lose the house eventually…so why bother”. And that goes along with that banks are at fault mentality you talked about.
.-= Lakita (PFJourney)´s last post: Should I Hurry to Pay off My Student Loans =-.
Yeah, you’ve got a great point there. Most people can see their savings account dwindling down slowly, and rather than letting them get down to $0 are acting pro-actively.
Credit cards debts are short term debts that need to be settled first, therefore if I have extra money, I will use it to pay off the credit cards debts first.
No doubts credit cards bring us convenience. One can buy things by swapping the cards, therefore if one is not careful in spending, it will lead to overspending easily. I have the experience of overspending by using credit cards. I am now every careful in every financial decisions that I make in order not to abuse the use of my credit cards to incur a lot of short term debts. Now, my credit card bills look so much better at the end of every month .
While we’re on Should You Pay Off Your Mortgage or Credit Card?, you may want to investigate building societies and banks. If you’ve dealt with a building society for a previous mortgage or savings account you should call them first.