Credit card debt getting paid back before mortgage debt

By Jeremy Simon

Credit cards for those with bad credit are being paid back before consumers turn their attention to mortgage payments, based on the results of a new study from credit bureau Experian.

According to Experian's study, released June 20, 2007, many consumers with bad credit are opting to be late on mortgage payments rather than on credit card bills.

The study results showed that the percentage of subprime borrowers who were 30 days or more late on their mortgages rose to around 36 percent at the end of 2006 from about 32 percent at the start of 2003. Borrowers with Experian credit scores below 620 are considered "subprime." 

Meanwhile, the number of those identical bad credit consumers who were 30 days or more late on their credit cards dropped to around 24 percent in late 2006 from 32 percent in early 2003.

This finding represents a major shift from conventional behavior, which demonstrated that consumers address mortgage debt before credit card debt.

Separately, Experian found that prime borrowers (those with credit scores above 680) demonstrated more conventional behavior, possibly because they stand to lose more from a home foreclosure and are not as dependent on credit cards.

Experian found that these good credit consumers are still less likely to be late with mortgage payments than with credit card payments.

Subprime borrowers often put down small or zero payments on a home, and should housing prices have decline since their purchase, they could in fact owe more than the house is worth. In such cases, walking away might be the easy choice.

Experian provided other possible explanations provided by Experian for the focus on credit card debt at the expense of mortgage debt. One is the likelihood that subprime borrowers are aware that the new federal bankruptcy law makes it much tougher to shed credit card debt by declaring bankruptcy.

Also, consumers with bad credit may realize that they have significantly more flexibility to be late on mortgage payments. In certain states, the very earliest that a foreclosure can occur is four months, with foreclosures usually taking six months to a year, and as long as more than two years in some locales, notes the Mortgage Bankers Association.

Finally, there is the possibility that rather than being strategic, consumers are simply overwhelmed by their debts, particularly increasing payments on adjustable-rate mortgages whose teaser rates are expiring and whole underlying index is advancing.

Published: July 3, 2007

	Three most recent Bad credit, credit repair stories: Tales from the credit crypt: Counselors' crazy debt client stories – Think you can astonish a credit counselor with your $20,000 credit card debt? Not a chance. Here are some stories from the trenches ... Issuer of 79.9% interest rate credit card defends its product – Subprime credit card marketers are looking for ways around new restrictions on sky-high fees for bad credit cards. One option they're testing: sky-high interest rates ... Interactive: Life cycle of a delinquent credit card account – The longer your debt goes unpaid, the more it changes hands. Learn the ins and outs of the delinquent debt cycle in this interactive presentation ...

	CreditCards.com's newsletter Did you like this story? Then sign up for CreditCards.com’s weekly e-newsletter for the latest news, advice, articles and tips. It's FREE. Once a week you will receive the top credit card industry news in your inbox. Sign up now!