3 Reasons Why You Should Pay The Mortgage Before Your Credit Card

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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:

  1. Food and Utilities
  2. Mortgage
  3. Car note
  4. 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?

(Photo credit: robtxgal)

  • Karmella

    Post CARD act, is it possible for credit limits to be lowered due to mortgage default? It was my impression that that would be a type of universal default provision that is no longer permitted.

    I think part of the logic is that paying the credit card bill allows continued purchase power – if you don’t pay that bill, presumably the access to credit is cut off. If you can’t pay even the minimums you owe, then you may feel you need to have the access to credit in order to fill your daily needs. Daily needs are a lot more pressing than a possible eviction a year down the road.

    If you even need a bill hierarchy for any reason other than speculation, then it’s probably time to reevaluate spending or income or both, because it seems to me like that’s a losing proposition.

  • http://www.pfsdebtrelief.com Stephan

    i read that same article and am equally shocked that people would do this. the idea when you are financial trouble to just ignore the payments is horrible and teaches future generations nothing about responsibility. Instead, we should be cutting our expenses, and doing everything we can to fulfill our obligations. Get a 2nd job, cut up your credit cards, etc. ignoring bills is not a way to a better future!

  • http://change-is-possible.net H Lee D

    Thankfully, I have never been in the position where I needed to decide which bills I was going to pay. I always just pay all of them.

    That said, the bank can have my house, and I’ll go live in a rental. I have no issue with that beyond the damage done to my credit.

  • Terry

    Stephen says Get a 2nd job…

    If you’re unemployed (and unskilled) and don’t have a 1st job, where are you going to get a 2nd job?

  • http://www.pfsdebtrelief.com Stephan

    terry, i believe there is always work out there, the question is do you want to do it? in fact, im currently working for the census, no skills needed, and it pays better than my day job. but seirosuly, any number of fast food restuarants or super markets are always hiring and dont require skills, so to say you cant find a job isnt saying there are no jobs, it just means you are chosing not to take the jobs that are out there. and trust me, i did the same, graduated from college last year and waited around for 6 months because i didnt like the jobs that were interested in me, but i eventually sucked it up knowing i am lucky to even have a job.