Imagine your income were sliced in half while your debts remained the same. How would you prioritize your payments? For those who have only credit cards, I’ve always suggested using, or at least understanding, the Debt Avalanche, but that doesn’t take into account other debts you might have such as personal loans and the mortgage.
Over the past couple of years, more consumers in precarious financial conditions due to unemployment or an otherwise lack of income have decided credit cards should be higher on the prioritization list than the mortgage. By the end of 2009, twice as many people were delinquent with their mortgage payments while current with credit card payments than were delinquent with credit card payments while current with mortgage payments. This is according to a study by the credit reporting bureau Trans Union, a company with millions of data points at its figurative fingertips.
Part of this might be due to the credit crunch and lower balances on credit cards in general, but it also may be due to the frequency of foreclosures and the general tendency for people to lose faith in the value of their homes as they watch the real estate market crumble. Many homeowners are giving up and walking away from houses with mortgages they can’t afford. If the only punishment is a tarnished credit report, there isn’t much of an incentive for people to keep paying money if they’re not building equity.
Also, families in financial trouble still need at least the basic necessities: food, water, and shelter. For those without a solid emergency fund, credit cards are the most typical financing strategy in times of need. You can even use a credit card to pay your mortgage.
I see the rationale for prioritizing these bills; if a credit card is revoked, someone may not be able to procure the necessities of life. A mortgage should be prioritized higher than credit cards, however, because the mortgage is secured debt. Your house is collateral. The bank that holds your mortgage can take away your house if you don’t pay. Even though some people are comfortable abandoning a house that has declined in value, it’s not a smart move. There’s a good chance real estate value will eventually return, so as long as you have a reasonable interest rate and have been paying down the principle of the loan, sitting tight will pay off.
Credit cards are unsecured loans. Knowing that this type of debt is a lower priority, credit cards will do whatever they can to get you to pay. They will call you, bother your neighbors, sell and even your debt to a collection agency who will do worse. The credit card issuers know that you won’t pay unless they make it seem like you’ll be in major trouble if you don’t send a check. Meanwhile, banks are ready to take your house if you don’t pay, even though most banks are struggling companies and don’t want to take on real estate that is performing poorly in the short term.
If you have to choose between making a mortgage payment and a credit card payment, choose the mortgage. Do you agree or disagree?
Published or updated February 4, 2010.