Paying Credit Card Debt Vs. Paying Your Mortgage – Which Should Have Priority?

You would think that the decision between paying off your mortgage and paying off your credit card bills would be a simple one

. Not so fast according to FICO Score Trends. In what's being considered a remarkable trend reversal, consumers are deciding to default on their mortgages instead of their credit cards.

"We're identifying lending industry situations in FICO Score Trends that to our knowledge have never been seen before," claimed Mark Greene, CEO of FICO, in a press release. "Economic instability is creating unknown risk in lenders' credit portfolios as well as counter-intuitive trends in consumer behavior."

The Role Reversal

The press release explains that the shift in Americans defaulting on home loans instead of credit started last year. According to their analysis, FICO claimed that 2009 saw 0.3% homeowners defaulted on their mortgages, whereas only 0.1% defaulted on their unsecured debts. This is a stark difference when you consider that in 2005 the amount of people who defaulted on their credit cards numbered 3 times more than those who reneged on their home loans.

Why Is It Happening?

The plummeting price of real estate, homes in particular, is a major culprit. It used to be that when you purchased a home, it was your primary asset. Now with house prices plummeting almost 20% of homeowners owe more on their house than it's worth. And house prices have yet to bottom out.

Many have watched the value of their homes plummet and see no reason to hold on to them. Even some mortgage authorities are suggesting that homeowners in this predicament should simply walk away from the home, fix the damage through credit repair and start the whole process over in a better economy.

A few other contributing factors include the increase in loan-modification programs and stricter credit card policies. It used to be if you missed a few mortgage payments, the bank foreclosed on your house, end of story. With the rise of loan modification programs consumers are able to keep their homes regardless of missed payments.

On the other side of the coin you have credit card companies enforcing stringent policies because they're seeing a record numbers of borrowers let their debts be charged-off and sent to collection agencies. What this creates is a financial climate where defaulting on your home loan before your credit cards might just be the best option.

A Complicated Decision

If you're forced into a situation where you need to decide between paying off your mortgage or your credit cards, you need to seek professional advice. While your home may be your greatest asset, it could be impossible to live without the revolving credit that puts food on your table.

While the choice between which one to pay off used to be a no-brainer, that's not necessarily the case anymore. If these trying financial times are forcing you to choose, make sure you do so after speaking to all of the players. Call your lender, speak to the banks, get legal help if necessary, but don't make this decision on a whim. Either way there's going to be bumps in the road, it's best to have all of the facts first.

Paying Credit Card Debt Vs. Paying Your Mortgage Which Should Have Priority?

By: Benjamin Axel

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