Credit Cards Now Top Debt Priority

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By Eileen A.J. Connelly, AP Personal Finance Writer

NEW YORK (AP) — Credit cards have moved to the top of the bill pile, displacing mortgages as the priority for many consumers.

"It used to be clearly the case that consumers viewed their mortgage as their No. 1 payment obligation. That is no longer," said Mark Greene, CEO of FICO Inc., the producer of consumer credit scores.

Instead, the data FICO crunches shows that credit cards have taken over. Despite a tough economy, in the past two years payments on credit cards were half as likely to become 90 days past due as they were in 2005. And for borrowers with high credit scores, normally the least risky borrowers, the percentage falling behind on a mortgage is now higher than for credit cards.

There are several reasons for the surprising shift. One is that so many mortgages are underwater — meaning the debt owed on the home is greater than the home's value.

"But we suspect another reason is that credit cards are increasingly important to people," Greene said.

One sign of the role cards now play is how they are used. Last month, for instance, 10% of consumers used their cards to buy groceries. "There's nothing wrong with that, but they then revolved those charges, they didn't pay them off," Greene said. "People are increasingly focused on the use of credit cards as a sort of vital tool for their lives."

An expanded role for credit means a higher profile for FICO. Based in Minneapolis, the company sells its scores to banks and other lenders to help them decide who is a good risk for borrowing money. A decade ago, most consumers were less aware of their credit scores. That's changed today, with the recession driving many to pay closer attention to their personal finances.

FICO has no plans to shift the focus of its business more toward consumers. But it has opened up in recent months, sharing the components that go into a credit score and giving the public better insight into what behaviors can help or hurt a score.

The Associated Press talked with Greene, an economist by training who has led FICO since 2007, about the role of credit scores, new credit card regulations and what the data his company processes can predict about the economy.

Here are excerpts from that interview:

Q: In the months leading up to the new credit card law, banks cut the number of cards by 15% and cut the amount of available credit by $1 trillion. Doesn't that hurt consumers, given the evidence you've seen about the growing importance of credit cards?

A: One thing to consider is how much of that trillion dollars was actually used? A lot of those accounts were unused.

Decreasing credit lines was very important for banks to thrive or survive through the credit crunch. We worked with a number of banks to get this exactly right. The banks that got it right operated with a scalpel, not with a butcher blade, because your limits are different from mine, and your need for that line is different from mine. A number of banks got this right. But in the early days, some of them didn't, and they did things like 25% off everybody's line. That annoyed people.

Q: It wasn't just annoying. These actions hurt the credit scores of a lot of people, by cutting their credit lines close to their balances.

A: That would result in a drop of about 20 points. I understand the reason for the concern. But there's lots of statistical evidence that people who are at or near their limits, regardless of how they got there, whether it's your fault or the bank's fault, are higher risk. And that's all that the 20-point drop is saying. But after several months of demonstrating that you're not tipping over that line, then your FICO score tends to return to its prior level. We think that's an appropriate way for the scores to react. But I understand why people are concerned about it.

Q: The new credit card law requires card statements disclose how long it will take to pay off a balance by making minimum payments. Do you think this sort of information will matter to consumers? Will it be a game changer?

A: I think so. A year or two from now, it may not be viewed in hindsight as such a big deal, because it will be part of the fabric of doing business. But I think initially, it will be a big change. I'm a big believer in those kinds of disclosures.

Q: Why do you think consumers are so much more aware of credit scores than they were just a few years ago?

A: I think they've learned a lesson from this recession. That you can and should be a good financial steward and keep your own financial house in order. There are many things that are needed there, but paying attention to your FICO score is one of them.

Q: In recent months you've let the public know more about what elements go into a FICO score and what actions can change it. Why make that information known now?

A: I think it's consistent with the industry trying to become more transparent. We try to tell people all the data we look at and the good behavior and bad behavior that can help or detract from their score. What we don't do is publish the actual algorithm, because that's the secret sauce. But we try to describe the ingredients in the secret sauce and give consumers the information they need to help themselves out. We try to educate people enough that they can do their own credit repair, without having to resort to some of these somewhat shady credit repair operations.

Q: Can the consumer data that you process predict anything about the economy in coming months?

A: I used to be a forecasting economist at the Fed, so I know the dangers of predictions. But I think that the next six-to-nine months still look bumpy. I think the trend is modestly up. But in any given week or any given month, the numbers will wobble around.

We're going to look for consumers' pocketbooks to improve in two places, credit cards and mortgages, and both of those are heavily dependent on the unemployment rate. The conventional wisdom is that unemployment is sort of going sideways for the next few months and then will trend in a favorable direction. But mortgages and cards tend to lag by several months. So if we've got a few more months of sideways unemployment, then we've got six-to-nine months of sideways performance in mortgages and credit cards.

Q: Do you think banks will return to providing easy credit at some point?

A: The large card issuers are already getting aggressively back into recruiting for new customers. That's a little bit incongruous when you realize that the credit card regulations are causing others to scale back. It's clearly not back to the levels that it was prior to two years ago, but people are definitely planning to solicit for new customers.

They are doing so a little more thoughtfully now. One of the things that means is that card issuers have to understand more about the totality of people's circumstances. Does this person also have a student loan and a mortgage that's in trouble? I think that lesson has been learned.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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