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CU System
Filene study Consumers pay cards before mortgages
MADISON, Wis. (11/29/10)--Consumers are paying off credit cards before their mortgages, according to the newest report from Filene Research Institute, indicating that the stigma once associated with foreclosure is disappearing.
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These findings come as credit unions throughout North America seek new ways to measure repayment risk. In the report, “Consumer Credit Delinquencies: Why do Some Choose Credit Cards Over Mortgages,” Professor Ethan Cohen-Cole, of the Robert H. Smith School of Business at the University of Maryland, demonstrates that the disappearing stigma of foreclosure is coupled with a rational consideration by consumers to maintain liquidity during tough financial times. The delinquency data indicate:
* A large percentage of consumers choose delinquency on mortgages or credit cards, but not both--and a large fraction of that group chooses delinquency on mortgages while continuing payment on credit cards; * Areas with large declines in home prices show stronger patterns of borrowers paying their cards first in an effort to protect liquidity; * Debt patterns before delinquency are dramatically different than before bankruptcy; and * The tendency to protect credit cards is strongest among those with the least available credit, including the young, those with low credit scores, those with low income, and minorities.
The findings could lead to new, member-friendly lending practices, according to the Filene Research Institute. For example, credit unions that provide lines of credit or credit cards to stressed borrowers may find some improvement in the performance of these loans in the event of a mortgage delinquency. For more information about the report, use the link.
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