Are Your Debt Priorities Jumbled?

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TransUnion is out with a new study that shows how Americans prioritize debt. Among other findings, consumers rank car loans and credit card payments ahead of their monthly mortgage.

According to the TransUnion’s quarterly look at consumer payment trend data, Americans pay off their biggest debts in an interesting pecking order, and it looks like this:

 

  1. Auto loan
  2. Credit card debt
  3. Home mortgage

TransUnion measures consumer payment priorities by delinquency dates. For example, in the third quarter of 2009, 60-day delinquency rates for auto loans were lowest of the big consumer debts (at 0.81%). Delinquency rates for credit cards clocked in at 1.1% and late payments for mortgages were far and away the biggest number, at 6.25% for 60-day late payments.

So why do consumers make sure they pay their auto loans and credit card payments first, sometimes at the expense of their mortgage payment? One reason is the dollar value — it’s much easier to make a $249 car payment, or a $115 credit card bill, than it is to pay off a $2,000 monthly mortgage payment.

Necessity is also a big factor. Says Ezra Becker, Director of Consulting and Strategy for TransUnion, "Consumers recognize that their credit cards are their primary purchasing vehicles in this economy." If you need food for the baby, or medicine to keep your health on an even keel, keeping your credit card in good shape isn’t a luxury, but a necessity.

It’s the same deal for a car loan. People need their wheels to get to work, otherwise they may not have a job at all. So making regular car payments becomes a huge priority.

But when something has to give payment-wise, it’s often the mortgage payment that gets postponed. Why is that? TransUnion points out that about 25% of all U.S. mortgage borrowers are underwater on their homes (meaning they owe more than the house is worth). The consumer ratings giant says that 5.3 million U.S. households owe at least 20% more than their homes are worth. Thus homeowners have less incentive to pay their mortgage on time.

The good news is that TransUnion expects mortgage delinquencies to drop in 2010. It estimates that payments that are 60-days late will decline by 3%, to 6.39% from 6.56%, by the end of the year. Credit card delinquencies should be down, too. According to TransUnion, the percent of credit card consumers 90 days late on their card debt will fall to 1.04% by the end of 2010 from 1.07% at the end of 2009.

"We believe the nation will see a turnaround in mortgage delinquencies in the coming year," adds Becker. "Tied directly to anticipated unemployment rates and housing values, the decrease in delinquencies should be gradual. (And) this is a dramatic shift from the 43 to 54 percent year-over-year increases we have seen the last three years."

"We anticipate that credit card delinquencies will decrease for the third straight year as consumers continue to keep incremental debt to a minimum and aggressively manage debt repayment. However, the decrease is projected to be smaller than in previous years, indicating that this might be the best consumers can do in managing delinquencies in the current economic environment. It will be interesting to see how the CARD Act, primarily taking effect in February 2010, will impact both consumer and lenders," says Becker.

For a more detailed look at U.S. consumer payment data, visit the TransUnion site.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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