I was reading a disturbing article the other day about people falling into financial trouble. Many individuals are making their credit card payments on time in lieu of paying their mortgage. With the housing market underwater, people are prioritizing their credit card debt and other bills over their mortgage payments. This actually runs contrary to normal behavior. Yet, the trend is increasing, because misinformed consumers are more worried about protecting their credit scores, rather than protecting their shelter. During periods of economic growth and prosperity, people typically pay their bills in the following manner:
- Food and Utilities
- Car note
- Credit cards/student loans/other unsecured debt
Why the change?
The current economic climate has changed the traditional way of thinking. More people are willing to skip their mortgage payments due to being upside down on their home loan. Many people see no point in making payments on a home whose value is less than the amount owed.
People have also become more focused on their short-term needs. So, people are paying credit card bills, cable bills, and cell phone bills first because they rely upon these products daily. You don’t see the results immediately of not making your mortgage payment since the foreclosure process takes a long time. Lots of people are able to live in their home for a year or longer before the foreclosure is final.
The mortgage payment is the largest payment that most people have, so it is often viewed as the most cumbersome. Let’s say an individual has $1,000 in their checking account. He can either apply the whole amount to his $1,000 mortgage payment or divide it amongst his other bills. Instead of paying the mortgage, he is likely to take that $1,000 and pay the car note, credit card bill, cable bill and cell phone bill. He thinks that this is the best decision because it’s enabling him to pay multiple bills.
Let’s take a look at 3 reasons why it still makes the most sense to pay your mortgage first:
Mortgage lenders do not take partial payments.
Auto finance companies, credit card companies, and other lenders all take partial payments, unlike mortgage companies. Mortgage lenders require you to make the full payment each month. If you miss one month’s mortgage payment then the next month you will be required to make 2 full monthly payments. This makes it very difficult to catch up on your mortgage payments when you fall behind.
Mortgage loans are secured loans.
Credit card debt is an unsecured loan meaning that it is not backed by any asset. While falling behind on your credit card payment is never a good thing, you will not lose your home or automobile. The worst that a credit card company can do is get a judgment against you and seek to attach a garnishment to your wages. Mortgage loans are secured debt which means that your mortgage lender can take your home to satisfy the outstanding debt. It may take a year or longer but eventually the bank will evict you from your home.
Mortgage payments have the biggest effect on your credit score.
The largest loan that most people get at any time in their life is their mortgage loan. This installment loan has the biggest impact on your credit rating. A default on your mortgage will lead to a substantial drop in your credit rating. This will lead to a reduction in your existing credit limit on other revolving loans such as your credit card loan. It makes no sense to make credit card payments instead of mortgage payments because the resulting mortgage default will dry up your credit limit.
What are your thoughts on this? What bills should be paid first and what is your bill payment hierarchy?