The trend of consumers paying their credit cards prior to their mortgages is occurring more readily than ever before, according to a new study from TransUnion.
‘Conventional wisdom has always been that, when faced with a financial crisis, consumers will pay their secured obligations first, specifically their mortgages,’ says Sean Reardon, the author of the study and a consultant in TransUnion's analytics and decisioning services business unit. ‘However, a recent TransUnion analysis has found that increasingly more consumers are paying their credit cards before making mortgage payments. This analysis reaffirms the results of a previous TransUnion study that examined data between the third quarter of 2006 and the first quarter of 2008.’
The percentage of consumers current on credit cards and delinquent on mortgages first surpassed the percentage of consumers current on their mortgages and delinquent on credit cards in the first quarter of 2008. This ‘flip’ is representative of the change in the conventional wisdom around the payment hierarchy.
The latest study, conducted on consumers that had at least one credit card and one mortgage, examined 30-day credit card and mortgage delinquency data between the second quarter of 2008 and the third quarter of 2009. Although many industry analysts believed that a reversion to the conventional payment hierarchy would ensue once the worst of the recession has passed, that has not been the case, TransUnion says.
The company's study found that the hierarchy reversal has become even more widespread, with the percentage of consumers who are delinquent on their mortgages and current on their credit cards rising to 6.6% in the third quarter of 2009 from 4.3% in the first quarter of 2008. Conversely, the percentage of consumers who are delinquent on their credit cards and current on their mortgages decreased to 3.6% in the third quarter of 2009 from 4.1% in the first quarter of 2008.
‘This same trend is evident within the lowest-scoring risk segment,’ Reardon adds. ‘Moreover, it should be noted that the 'flip' in payment hierarchy in the lowest-scoring segment was evident earlier during the fourth quarter of 2007, compared to the first quarter of 2008 for the total market.’
The study found that the magnitude of delinquency in the lowest-scoring segment is significantly higher than that of the total market. The delinquency rate for consumers in this segment who were delinquent on their mortgages but current on their credit cards during the fourth quarter of 2007 was 19.1%, and rose to 29% in third quarter of 2009.
In a trend similar to that of the total market, the percentage of consumers delinquent on their credit cards but current on their mortgages decreased from 18.1% in the first quarter of 2008 to 14.5% in the third quarter of 2009.
The payment hierarchy shifts are even more pronounced in states such as California and Florida. Within California, the percentage of consumers delinquent on their mortgages but current on their credit cards increased from 3.5% in the third quarter of 2007 to 10.2% in the third quarter of 2009 – a 191% increase. In Florida, this same variable increased from 5.1% in the third quarter of 2007 to 12.4% in the third quarter of 2009 – a 143% increase. In this same timeframe, the U.S. experienced a 68% increase from 4% to 6.6%.
In contrast, the number of California consumers delinquent on their credit cards but current on their mortgages declined from 3.3% in the third quarter of 2007 to 2.7% in the third quarter of 2009. In Florida, this variable declined in the same timeframe from 5% in to 3.9%, TransUnion says.
‘The insight gained through this analysis reveals a lot about changing consumer preferences," says Ezra Becker, director of consulting and strategy in TransUnion's financial services business unit. "The financial services industry must recognize and adjust to the payment hierarchy shift with judicious modifications to business models, new assessments of specific areas of risk, and by strategic revisions to acquisition and account management strategies.’
The source of the underlying data used for this analysis was TransUnion's Trend Data, a proprietary historical database consisting of 27 million anonymous consumer records randomly sampled every quarter from TransUnion's national consumer credit database.