Mortgage, Car Loan, Credit Card: Pay Any Two

Imagine that you are in financial distress. You have a mortgage, a car loan, and credit cards, but cannot pay all three. Which gets paid and which gets stiffed?

Obviously, this is a lesser of evils situation, not an ideal one. Not paying any one of them will have negative consequences. Defaulting on the credit cards  will likely result in not being able to use them to buy more stuff. And the otherChicklet-currency two loans are secured, so not paying those bills could result in the loss of your wheels or roof over your head.

You might think that since shelter is so important, the mortgage would be the most likely bill to be paid. And since buying more stuff on the credit cards is less vital to a person in financial trouble, you might assume that credit cards would be the most likely to be defaulted on. Having your cards taken from you would suck, but not as much as having your car taken.

Not so. Last week Wallet Pop ran a post by Lita Epstein that looked at default data for these three types of loan. Credit cards do turn out to be more commonly defaulted on than car loans, but not by as much as you might have assumed. 1.1% of credit cards were 90 days delinquent in the third quarter. 0.81% of car loans were 60 days delinquent.

But way out in front in the delinquency derby are mortgages. According to TransUnion, in the third quarter of last year 6.25% of US mortgages were 60 days delinquent.

That is a big number and one that is, to say the least, counterintuitive. Isn’t losing the house the worst case scenario for most people? Wouldn’t you want to protect your home by paying the mortgage before you paid the other bills?

Yes and no. As I have argued here, the visceral preference that many people have for paying secured debt first is not, on close examination, as reasonable as it sounds. If nothing else, the interest rates on credit cards and car loans are generally much higher than those on mortgages, so paying them first could be saving the most money.

Then there is the ever-popular topic of strategic default. This is sometimes referred to as homeowners "just walking away" and was for a time called "jingle mail" because the homeowner would (figuratively) mail in the keys to the house. But on reflection it should be clear that this is not what strategic defaulters actually do.

Suppose you owe $400K on a house worth $300K in a non-recourse state and you can’t pay your bills. Do you sign the house over to the bank and move out? Of course not. You just stop paying the mortgage. Eventually the bank will foreclose, but by the time the sheriff shows up to evict you you will have had many months, maybe even a year, of rent-free living.

Needless to say, mortgage delinquency rates are highest in states suffering the worst declines in house prices, that is, the ones with the highest proportion of underwater houses. A staggering 14.53% of Nevada mortgages are delinquent.

So paying credit cards and car loans before mortgages could be the shrewd move after all. How did millions of households cleverly determine that this non-obvious strategy was the best course? I think the truth is that they didn’t.

As the Wallet Pop post discusses, not paying a car loan or a credit card has more obvious and immediate consequences than not paying a mortgage. Stop making your car payments and it will be repossessed. And credit cards may be as important to the American lifestyle as cars. Consumers reason that as long as they keep making the relatively modest minimum payments they will be able to keep using them. The fact that the card company is likely to close an account once they discover that the borrower has stopped making his mortgage payments may not occur to that many people.

Still, not paying the mortgage may be the right answer, even for the wrong reasons.


  • By steve, January 26, 2010 @ 2:22 pm

    For people living paycheck to paycheck, a job loss can devastate their ability to pay the mortgage. The working class don’t often have significant savings that can sustain the drop in income. As a result, the first priorities are food and utility bill payments to keep the lights and heat on. Next in consideration are your three categories.

    Even if you carry large balances, credit card interest only payments aren’t that large. If you keep paying those minimum payments, you can sustain yourself for a bit during unemployment. A car is necessary for your livelihood. Given that mortgage payments are so big, its no wonder that desperate people choose the car and credit card payments over the house. No one wants to be forced to choose, but I can see why mortgages lose out to credit cards (which can pay for food) and cars (which you can sleep in after foreclosure and are critical in America for transportation).

  • By Jim, January 26, 2010 @ 2:36 pm

    I would guess that people may default on their mortgages more than smaller debts because they simply can’t afford the mortgage payment and/or because the amount of debt with a mortgage seems too overwhelming to them.

    Say I have a car loan and a mortgage. The car loan is $300 a month and the mortgage is $1500 a month. I’m mostly getting by making $45k a year. I have negligible savings. Then I lose my job and I’m getting $400 a month in unemployment. Theres no way I can pay that mortgage. Plus I owe $230k on that house and its now only worth $175k. THe car however I bought 2 years ago new and its now worth $7k and I owe $9k still. I simply can’t afford that mortgage but I can still afford my car payment. Plus that house loan is $230k which is a very big number while I owe only $9k on the car which is a much smaller number. I’m scared by that $230k of debt but not as worried about $9k debt.

    Why people would pay credit cards before mortgage and car loans is more puzzling. It might be because they are still using the cards to subsidize their spending even though they are insolvent and spending more than they earn. It seems that people will continue to over spend until they are stopped in some way. So if I’m making $45k and spending $55k then I’ll continue to do that until the credit runs out. In order to keep the credit from running out I have to keep making my minimum payments.

    Maybe credit card and car loans are written off faster than mortgages. I assume it would take a while for someone to go from default to being actually evicted in foreclosure. I’m guessing 6-12 months from the day you miss a mortgage to the day the bank officially takes ownership and you’re officially foreclosed. So that whole time you may show on the books as being in default status. But with a credit card or car loan they may move more swiftly from default to written off or car repossession. I’m not sure on that but its a theory.

  • By Jim, January 26, 2010 @ 2:37 pm

    Looks like Steve had the same thoughts I did but I was very slow in typing mine.

  • By Jim, January 26, 2010 @ 2:38 pm

    “I’m getting $400 a month” I should have said $400 a week to be more realistic. But thats just made up example anyway so who cares. OK I’ll stop posting now..

  • By Kosmo @ The Casual Observer, January 26, 2010 @ 5:45 pm

    If you can manage to avoid eventual foreclosure, putting money toward the mortgage also makes sense as a bankruptcy asset shelter :)

  • By bex, January 27, 2010 @ 10:47 am

    How many student loans are in delinquency? I’d imagine more than houses. They can’t reposes your education ;-)

  • By bad credit car loans nevada, August 30, 2011 @ 2:32 am

    Thank you for your information and a good response from you.

  • By car transport quotes, September 10, 2011 @ 6:47 am

    Hi, really a very nice information is provided here and definitely your tips would be very beneficial for me because I’m also facing same problem with me.

  • By bad credit car loans nevada, February 17, 2013 @ 11:35 pm

    Thank you for visiting our website.

  • By http://4seohunt.Biz, March 16, 2013 @ 2:21 am

    Wow, these include SO pretty! Best wishes Rachel, there’re really very beautiful.

  • By web design christchurch, April 10, 2013 @ 12:10 am

    Google Sniper isn’t stopping and it is going up for this new Google Sniper 2. Basically, Brown was like you and me; he needed some extra cash but didn’t know how to get it. Therefore the question is, are they true internet marketers.

  • By long term loans bad credit uk, April 19, 2013 @ 7:16 am

    Excellent post. Keep posting such kind of information on your
    blog. Im really impressed by your blog.
    Hey there, You’ve performed an excellent job. I’ll definitely digg it and personally recommend to my acquaintances.

    I’m confident they will be benefited from this web site.

  • By best rates for loans, April 23, 2013 @ 12:54 pm

    Hi there everybody, here every person is sharing these familiarity, therefore it’s pleasant to read this blog, and I used to pay a quick visit this webpage daily.

  • By unsecured loans, April 24, 2013 @ 7:28 am

    Hmm is anyone else experiencing problems with the pictures
    on this blog loading? I’m trying to figure out if its a problem on my end or if it’s the blog.
    Any feed-back would be greatly appreciated.

  • By Brigida, April 25, 2013 @ 8:39 am

    I love your blog.. very nice colours & theme.
    Did you create this website yourself or did you hire
    someone to do it for you? Plz respond as I’m looking to create my own blog and would like to know where u got this from. thank you

  • By best loans deals, April 26, 2013 @ 10:40 am

    Hey there! I know this is somewhat off topic but I was wondering which blog platform are you using for this site?
    I’m getting tired of WordPress because I’ve had issues with hackers and I’m looking at options for another platform. I would be fantastic if you could point me in the direction of a good platform.

  • By great loans site, April 27, 2013 @ 2:16 am

    Magnificent site. Plenty of helpful info here. I am sending
    it to a few acquaintances ans additionally sharing in delicious.
    And naturally, thanks for your effort!

  • By imagen corporativa, May 2, 2013 @ 3:34 am

    entusiasmado; no dudo que leeré tus comentarios

  • By direct choice car insurance, May 2, 2013 @ 8:10 pm

    Attractive section of content. I just stumbled upon your web site
    and in accession capital to assert that I get actually enjoyed account your blog posts.
    Any way I’ll be subscribing to your feeds and even I achievement you access consistently fast.

  • By, May 8, 2013 @ 8:51 am

    I just couldn’t go away your site before suggesting that I actually enjoyed the usual info a person supply on your guests? Is gonna be again incessantly in order to check out new posts

  • By One Particular Broadoaks Country House In Windermere, May 11, 2013 @ 3:50 am

    WOW just what I was searching for. Came here by searching for cars

  • By, May 13, 2013 @ 12:21 am

    I don’t know how you’ve managed to handle it for that long.

  • By personal loans, May 16, 2013 @ 1:55 pm

    Oh well, never mind. It’s the old saying…when it can’t be done, better to do
    it yourself.

  • By best payday Loans, May 20, 2013 @ 9:11 pm

    I want to get it all done because I won’t have the chance to get it done if not!

  • By Madelaine, May 23, 2013 @ 2:48 am

    Here are some other things to do. The Valuer will be appointed from the list that is not a refinance expert.
    You’ll never know if you’re getting a good rate on the payday Bad
    Credit Loans Lenders Uk company’s website or literature. We’ve seen him here
    before on a couple of hub caps and a gas cap.

    A great thing about the reverse mortgage bad credit loans
    lenders uk limit will remain at $625, 500.

  • By quemadores de biomasa, May 24, 2013 @ 6:42 am

    I am in fact happy to glance at this web site posts which carries tons of helpful facts, thanks for
    providing such information.

  • By best unsecured loans, June 7, 2013 @ 3:03 pm

    I’ve gotta get it done because I won’t have the opportunity to get it done if not!

  • By no credit check boat loans, June 15, 2013 @ 1:11 am

    If you wish to tackle all associated with financial adversities anyone
    then should prefer credit are lower. Typically, these kinds pertaining to loans can
    level in size doing $25,000 and could be repaid over 6 or
    7 years, depending close to lender.

  • By bad credit loan, June 26, 2013 @ 9:56 pm

    In most cases you require a debit bankcard but some banking institutions do not expect
    this. With per payday loan, you can won’t be attracted to let repaymetn slide as individuals could be using a savings site withdrawal.

  • By pharmacist salary, July 1, 2013 @ 12:54 pm

    Very great post. I simply stumbled upon your blog and wished to say that I’ve really loved browsing your weblog posts. After all I’ll be subscribing on your rss feed and I’m hoping you write once more soon!

  • By vivienda en Fuensalida, July 11, 2013 @ 8:14 am

    Hi there, i read your blog from time to time and i own a similar
    one and i was just wondering if you get a lot of spam comments?
    If so how do you protect against it, any plugin or anything you
    can recommend? I get so much lately it’s driving me mad so any support is very much appreciated.

  • By fast payday loans, August 17, 2013 @ 12:07 pm

    Gaining this no send payday loan have to have to take no
    alot more than 2 several. The cost of your respective payday loan can in reality save you savings versus the associated
    with fees that consider gain by failing to pay your bills period.

Other Links to this Post

  1. Credit Debt Aid — October 7, 2010 @ 1:50 pm

RSS feed for comments on this post. TrackBack URI

Leave a comment

WordPress Themes