The Debt Consumers Always Pay First

When it comes to prioritizing debt repayments, whether consumers choose their credit card bill over their mortgage depends on the economic climate. But they will always choose to pay their auto loan first, no matter the fiscal environment.

And as the economy continues to improve, Americans are once again re-prioritizing their debts. A new study from Trans Union, a credit and information management firm, reveals consumers are reversing payment trends they set during the Great Recession, and are now paying their mortgages ahead of credit card debt.

In September 2008, the housing crisis pushed consumers into a pattern of paying their credit card debts first.

However, auto loans have consistently taken the top spot in repayment since 2003.

Trans Union looked at monthly snapshots of consumer information for a decade (December 2002 through December 2012). The 2.5 million consumers studied all had at least one mortgage, auto loan and open credit card in good standing each month.

The study looked at the Case-Shiller 20-City Home Price Index (HPI) and compared to both the 30-day mortgage delinquency rate and 30-day credit card delinquency rate.  If the 30-day credit card delinquency rate was 1.50% and the 30-day mortgage delinquency rate was 2.25%, the spread between the two would be 0.75%.

For example, in September 2008, the 30-day mortgage and credit card delinquency rates were 3.32% and 3.29%, respectively. And in September 2013, the rates were 1.79% and 1.86%, with more people falling delinquent on credit instead of mortgages.

“The traditional hierarchy of payment was driven by generally appreciating home values, available card credit and the fact that people had an income,” says Ezra Becker, co-author of the study and vice president of research and consulting in TransUnion’s financial services business unit. “During the recession, we saw a doubling of the unemployment rate, card lenders getting more conservative, so we saw the number two and three positions of mortgage and credit switching.”

Auto loans always stayed in the top spot, Becker points out, because there are no viable alternatives. “If you don’t pay your auto loan, the alternative is public transportation,” he says. “In many cases, that is not as effective or efficient as you’d like. In downtown Chicago, New York City or Washington, D.C., that is one thing.”

Location also mattered in terms of how consumers ranked the importance of their payments. People living in areas that were hit hard by the housing crisis were less likely to pay their mortgages, like in Los Angeles, according to Becker. The return to “normal” hierarchy took six years, and a stabilization of the housing market in that location, he says.

But just because consumers are making mortgage payments ahead of credit cards, it doesn’t mean they are any less reliant on credit, Becker says. He predicts that credit card delinquencies will likely uptick due to the payment shift.

“It shows more what forces act upon consumers during times of financial distress,” he says. “The primary driver of divorce in this country is financial constraint—when times are difficult for consumers, do they pay their credit cards, or buy groceries for their kids?”