A new study says that in 2011, people in the U.S. chose to pay their auto loans before their credit cards or mortgages when faced with a decision about which bills to pay. TransUnion, the third-largest credit bureau in the nation, studied a sample of roughly 4 million consumers and found that while 39.1% of them have been delinquent on their mortgages and 17.3% were behind in payments to their credit card companies, only 9.5% of the study sample was delinquent on their auto loans.
Delinquencies inadvertly lead to lower credit scores. While US Economy is still recovering from recessions, some areas where hit harder than others. For example Southern part of United States saw lower credit scores, compared to Northern part. Take a look at Credit-Land.com USA Credit Score Map:
Historically, consumers short on cash have first stopped making payments on their credit card loans, then forgone the auto loan, and only after defaulting on both of these did they risk getting behind on their mortgages. Ezra Becker, a vice president at TransUnion, says that the change in priorities “speaks to the changing forces acting upon consumers post-recession, and it`s a great illustration of the fact that the recession did have a profound effect on the way consumers make decisions.”
When faced with the unpleasant situation of not being able to cover all the bills that come in, what factors influence the decision to pay one bill and not another? While it would seem that having a roof over our heads would be anyone`s clear priority, the decision is not always that simple.
Home, Car, or Credit Card – Which Comes First?
For a person who may be unemployed and looking for work, having access to a car can be vital – especially in areas where public transportation is not easily accessible. Also, cash-strapped cardholders may depend on being able to use their credit card to purchase everyday essentials; something they would not be able to do if their credit cards are not in good standing and their charging privileges are revoked.
When it comes to home equity, a homeowner who is already upside-down on her mortgage may feel that there isn`t much point prioritizing a home loan over an auto loan, especially if she has equity in her car after making payments for a substantial amount of time. It`s all a question of what people see as most valuable for their day-to-day survival, as well as what will hold value in the future.
“The auto loan is seldom the first choice when a consumer has to decide which payment to miss. The impact of repossession is greater than the loss of a credit card. In addition, consumers may have equity in their autos… that they are looking to preserve, which is no longer the case for most homes. In fact, negative equity has become increasingly common for homes, which may further contribute to the shift in payment preference to auto loans,” says Becker.
Strategies for Staying Solvent
Of course everyone knows that ideally, we need to pay all three of these things – car, home, and credit card loans. Becoming delinquent on one of them is not something that anyone wants to do, but sometimes people get into a hard place and feel they have no choice but to choose. However, preserving your credit score is extremely important, and missing credit card payment due dates is the number one thing that negatively impacts your credit score. If you are having trouble paying your minimum payment due, the first thing you should do is pick up the phone and call your credit card company. They are almost always willing to work out an alternate payment plan or adjust your payment due date to one that`s easier for you to meet.
It`s always a good idea to make a monthly budget so you can plan where your money is going to go and take control of your finances. When you sit down to write out your budget, you need to understand how your minimum payment due is calculated. Your minimum payment will always be a percentage of your total balance – typically 2-5% of the total. So if you are carrying a balance of $5,000 on your credit card, your minimum monthly payment will be somewhere between $100 and $250. Paying only your minimum won`t help you make much of a dent in your balance, but it will keep you from defaulting on your card agreement.
Light at the End of the Tunnel?
Matt Komos, who co-authored the study and is a consultant at TransUnion, says “It appears that the shift back to prioritizing mortgage payments ahead of credit cards – or auto loans – may only occur once the housing market has stabilized and begins its recovery and the unemployment situation shows significant improvement.”
The recent news of lower unemployment rates gives a glimmer of hope that we are on the road to recovery; perhaps soon the housing market will begin to stabilize and more households will be able to stop choosing which bills to pay and be able to pay them all.