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Written by admin on March 16th, 2010

Consumers Under Growing Financial Duress

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There are plenty of numbers and figures published that are used as barometers for the state of the economy. One of the numbers is the percent of consumers who are behind on their mortgage payments but have credit card accounts that are current. When the number goes up it is taken as a sign that consumers are under greater financial duress.

The reason a higher number indicates problems is that it means consumers are paying the smaller bills like credit cards so they can maintain easy access to cash and credit. Paying a mortgage payment does not provide borrowing ability. As Sean Reardon with TransUnion told Reuters, “You cannot buy groceries with your house.” It cannot be stated more succinctly.

TransUnion did a study on consumers with a particular financial profile. They owned one credit card and one mortgage. The study looked at delinquency rates from the 4th quarter of 2008 and the 3rd quarter of 2009.

The number of consumers who became delinquent on their mortgages but stayed current on the credit card payments increased to 6.6 percent by the 3rd quarter of 2009. A year ago the rate was 4.9 percent indicating a significant increase.

In the past, consumers faced with paying bills when there was not enough household income to cover all the payments due, would pay the secured loans first. Mortgages were at the top of the list. That appears to have changed as many financially strapped consumers turn their backs on secured loans and pay the revolving credit payments first. It is probably safe to assume that in some cases the family believes it will eventually lose the house to foreclosure anyway.

Now consumers seem to be giving up on their mortgages and concentrating on keeping access to credit open. When unemployed or working reduced hours, it can be difficult to find enough money to cover the essential day-to-day expenses. The rise in the number of consumers paying credit cards before mortgages indicates another crisis is brewing in the housing industry as the number of foreclosures continues to rise.

In related news, the amount of consumer credit has fallen also. Credit markets remain tight and the amount of consumer credit has fallen each of the eleven months through December 2009. The amount of outstanding consumer credit as of the end of December was $2.457 trillion. This amount represents a .8 percent annualized decrease for December.

Credit card balances dropped $8.55 billion in December. Credit card balances have now dropped each of fifteen months as of December 2009.

Meeting financial obligations in an economy like the one that exists today is challenging. One in five Americans is unemployed. Consumers are making necessary changes to their payment priorities in order to insure they can buy essentials.

The long term consequences, of what is being called a change in the payment hierarchy, is uncertain at this point. But the financial industry is paying close attention to determine what changes will be needed to meet consumer needs.

Related posts:

1. Be Wary of Debt Consolidation
2. Foreclosures Rise In December Disappointing Everyone
3. Consumer Loan Defaults Seem to be Slowing
4. Banks Considering Offering Payday Loans
5. Mortgage Companies Helping Families Walk From Mortgage Debt