Should You Pay Your Mortgage or Your Credit Card?

In what might be a sign that Americans’ finances are getting back to normal, consumers are now less likely to be late paying their mortgages than their credit card bills, reversing a troubling trend that began in 2008.

Traditionally, consumers have made paying their monthly mortgage bills a top priority. When the Great Recession struck, however, consumers faced with tough choices increasingly chose paying their credit card bills over their mortgages. Starting in 2008, consumers were far more likely to be late on mortgages than credit card bills, suggesting consumers were in such dire straits that their fear over losing short-term credit was even greater than the fear of losing their homes.

Credit reporting agency TransUnion found in a study that nationally, payment priorities fell back into place last fall. There are still individual markets, such as Chicago, where payment priorities remain upside down.

“One of the biggest impacts of the Great Recession to the credit system was its influence on consumer payment patterns,” said Ezra Becker, co-author of the study and vice president of research and consulting for TransUnion. “As unemployment rose and home prices cratered, increasingly more consumers were faced with financial constraints and had to make difficult choices — and many chose to value their credit card relationships above their mortgages.”

At the height of the recession, about one in 20 mortgage-holders were late by 30 days or more — 4.92% — compared to the 3.99% of consumers who were late on credit card payments.

By comparison, just five years earlier, only 1.26% of mortgage holders were late, while nearly double that rate — 2.25% — were late with credit cards.

The study also found that, during boom and bust cycles alike, consumers place an even higher priority on car payments than either mortgage or credit card payments. While car payment delinquencies rose during the recession to nearly double their pre-recession rate, they remained consistently less than half the rate of other late payments.

That makes sense. Losing a car to repossession would have the most immediate impact on a consumer’s life, and almost certainly, ability to generate income. Plus, it’s far easier to repossess a car than a home, so the consequences of late car payments are much more immediate.

Meanwhile, during the Great Recession, many consumers stopped making mortgage payments, relatively secure in the knowledge that it might take months or even years before they would be evicted. Some were engaging in “strategic default,” while others negotiated loan modifications. And while late fees piled up, the impact of those fees was not as immediate as the consequences of a late credit card payment, which could trigger a large interest rate increase or cancellation of the card within days.

Of course, all late payments are bad, and they all lead to credit score trouble and almost certainly, late fees. And if you default on your home, a foreclosure will do much more damage to a credit score than late credit card payments (you can simulate how big of a hit your credit score would take using free credit scoring tools on Credit.com). But when faced with all bad options, picking the least bad option — which creditor to put off — is a tricky, individual decision.

Becker said the numbers suggest something other than a strict financial decision to him. He said unexpected market dynamics — the fast plummeting of home prices, for example — can cause people to behave in unpredictable ways.

“When the market dynamic is what people expect, i.e. home values are increasing and unemployment is under control, then the payment hierarchy is stable. It’s when an unexpected shock hits the market, like home value depreciation or major increases in unemployment, that the payment hierarchy is subject to change, as consumers reassess which loan relationships are more important to them at that time,” Becker said.

The Great Recession mess isn’t completely cleaned up. Mortgage late payments were 1.7% in December, still about 25% higher than they were in September of 2004. But the good news: credit card delinquency rates are down dramatically even from the “boom” times of 2004, and even late car payments are slightly down compared to that year.