Paying the Credit Card Bill Over the Mortgage
Businessweek.com had a really interesting angle on the sub-prime mortgage situation. In this article, author Peter Coy explains that many sub-prime borrowers are choosing to pay the credit card bill first and the mortgage if there’s anything left over.
It seems the percentage of sub-prime borrowers 30 or more days late on their mortgage rose from 32% to 36% from 2003 to 2006. At the same time, those with credit cards 30 or more days late dropped from 32% to 24% over the same time period.
I find this fascinating. I always assumed in an extreme emergency people would pay their bills in roughly this order: shelter, food, utilities, everything else. It seems that’s not the formula for a large group of people (according to Freddie Mac, 5% of all home loans are to sub-prime borrowers) .
I tend to agree with the author’s analysis that the reason for this peculiar finding is that many sub-prime borrowers have little to lose in foreclosure. They’re already sub-prime credit risks. A foreclosure’s not going to lower their already-low credit score much. And many of them put little or no money down on these houses. Combine that with the fact that foreclosure takes a remarkably long time and I can see why you’d get people more interested in making their credit card than mortgage payments. With a current credit card you can buy groceries and gas. Not so much with a current mortgage.
credit mortgage
June 25th, 2007 at 12:11 pm
There may be one other good reason for this: interest rates.
Suppose you have a mortgage AND are neck-deep in credit card debt on which you can only afford the monthly minimum. If you fall behind on the mortgage you are facing the long drawn-out threat of foreclosure and you might just get caught back up before that happens.
If you are late on you credit card debt your interest rate may double — or even triple or more! Suddenly you’ve moved from a 5% teaser rate to 28%. That’s it for you. You’re done. Broke. There is no conceivable way you can recover because there is no way to meet those new minimums.
In that case I can see why missing a house payment or two seems like the lesser of two evils.
June 26th, 2007 at 5:42 pm