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The Worst Financial Advice I’ve Ever Seen From a Major Publication

By Erik Folgate

credit card mortgages bankingToday, one of our writers came across an article that made me want to throw up just from reading the title: Forget the Mortgage, I’m Paying My Credit Card Bill. Oh man, where do I start? I honestly feel bad for the people that write this crap and for the people that they interview, because they really have no idea how much damage their advice is doing to the American people. I thought the title was a joke at first. I thought the article would make a case for paying your credit card first, then go back to reality about how paying your mortgage and keeping a roof over your head should be the first priority. But, that never happened!

The article starts off with statistics from TransUnion about the increase in defaulted mortgages and a decrease in defaulted credit card accounts.

A recent study developed by TransUnion found the percentage of Americans who were current on their credit cards but behind on their mortgage increased to 6.6 percent in the third quarter of 2009, up from 4.3 percent in the first quarter of 2008. Meanwhile, the share of consumers making mortgage payments on time but behind on their credit cards moved in the opposite direction, sliding from 4.1 percent to 3.6 percent over the same time period.

Did the “journalist” ever stop to think that this statistic could be interpreted a different way? Could it be that the amount of people working to get out of debt has increased more than the amount of people defaulting on their mortgages? This recession and unemployment rate has made people wake up. They don’t want credit card debt anymore, but that doesn’t mean the same people that are paying off credit cards are also defaulting on their mortgages because of it. They’re selling stuff, taking second jobs, and getting the HELL out of debt, because being in so much debt was what got them in a bad situation in the first place.

Then, he goes on to blame the housing market for the reason that people are defaulting on their mortgages and choosing to pay their credit card bills first.

When home prices turned south–falling roughly 30 percent from their peak in the second quarter of 2006–a great deal of borrowers watched the value of their homes drop below what they owed on their mortgages. Today, roughly one in four homeowners finds himself in this position, which is also known as being “underwater.” Without equity in their homes, such borrowers are more likely to default.

There are some people doing this, but most of them are investors who aren’t treating the property like it’s their HOME. Why do you care about the appraised value of your home when you have no intentions of moving? Why does it matter? The market value of a home is ALL relative. The house is worth as much as someone is willing to pay for it. Yes, if you bought during the speculative boom in 2004 or 2005, you probably bought at an inflated price, but that’s no reason to walk away and trash your credit for the next 7 years and not be bankable AT ALL for the next 3 years.

Then another smart soul chimes in:

“They don’t see any value in putting money into an asset that has lost that much value and will probably never regain that value to offset the mortgages,” says Celia Chen, of Moody’s Economy.com.

Never regain its value? Those are some pretty strong words Celia. How is she so sure that the house will NEVER regain the value they bought it for?

Now on to Keith Gumbinger, the VP of HSH.com. His organization MUST really love credit card companies, even though his website is all about mortgages, because this guy is out of his mind.

“It is hard to operate in our society without a credit card today,” Gumbinger says.

Yeah, it’s so hard to operate without a credit card. I don’t know how I would ever survive without one. Oh wait, I do survive without them every single day and so do millions of other Americans. This is just garbage that bankers try to brainwash us with. They want us to be dependent on consumer debt for the rest of our lives. They want us paying a payment every single day of our adult lives. Is that what you want? Do you want to be a slave to a lender for the rest of your life, or do you want to have the freedom of knowing that you don’t owe anyone, anything.

Here’s another great one from Gumbinger:

“For a borrower who has got a significant [cash] shortfall, it is a completely rational decision [to pay off a credit card bill while defaulting on a mortgage],” Gumbinger says.

Let me be clear (I sound like Obama). Do not ever pay your credit card bill before your mortgage or rent. You need to take care of your basic necessities first in this order: food, utilities, shelter, clothing/basic transportation. Everything else gets pushed aside if you cannot pay it. Credit card issuers loan you unsecured money (meaning there’s no physical object attached to the debt), and they hope that you pay them back in good faith. Because this debt is unsecured, they charge you a crazy interest rate to make up for the risk they are taking by loaning you the money without any collateral. Paying off your credit card first and jeopardizing a roof over your head for you and your family is ridiculous. Yes, you will have 6 months to a year before a mortgage lender actually forecloses on you, but it will NOT be a fun, easy process. Your credit will be ruined for a very long time, and they will SUE THE HELL OUT OF YOU for the difference between what you owe and how much they resold the house for. The article never talks about that part of walking away from a house. The credit card company can sue you too, but it often takes them longer to file suit then it does a mortgage lender. Would you rather be sued for $5k or $50k?

I really wish stuff like this was never published, because all it does is make people more dependent on credit cards and make them think that walking away from their mortgage is okay and everything will be fine. Pay the IRS first, the mortgage second, and everything else after that.

(photo credit: wynlok)

Erik Folgate
Erik and his wife, Lindzee, live in Orlando, Florida with a baby boy on the way. Erik works as an account manager for a marketing company, and considers counseling friends, family and the readers of Money Crashers his personal ministry to others. Erik became passionate about personal finance and helping others make wise financial decisions after racking up over $20k in credit card and student loan debt within the first two years of college.

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Comments

  • http://www.clarifinancial.com Aaron @ Clarifinancial

    You know, we should just keep in mind that the job of journalists at big media companies is to get and maintain attention, so their corporate employers can sell advertising. It is not to analyze data critically and dig for the truth. They approach a story with ‘what’s an interesting angle,’ instead of ‘what’s really going on.’

    Unfortunately, they get the attention and fool a lot of people with a hodgepodge of statistics and anecdotes that may or may not add up. I guess that includes Y! too.

  • http://www.yourfinances101.com/blog David/Yourfinances101

    What’s more important–having a healthy credit card balance or a roof over your head?

    It is beyond simple.

  • Diamond

    Bravo to you for setting the record straight! We truly do perish for lack of knowledge. I actually read this article and as an avid Dave Ramsey follower who is one year away from being totally debt free, I was cringing.

    Like you I feel for the countless number of people who will read that junk, and adopt it because “Everybody else is doing it.” I understand what Aaron@Clarifinancial is saying about big media, but the truth of the matter is big media has an obligation to not just report stats and facts but common sense as well. That article could and should have been better balanced. There are some folks who take what “reputable” media says as gospel. News is supposed to be fair and balanced so folks are left to make up their own minds.

    That being said, we are not robots. Read and think people. This is common sense stuff, not rocket scientry. “Food, clothing, shelter, transportation, utilities. As long as those things are paid, you life to fight another day” – Dave Ramsey.

  • Skirnir Hamilton

    I have to agree that one should pay their mortgage first, but I do have to take issue with you on the ability to live without a credit card. I do believe it is difficult to live in the US today without a credit card. How do you buy an airline ticket? Drive to the airport? I mean most of us use our credit card when we travel for reserving the airline ticket and the hotel room. How do you order online? I do understand those that don’t trust themselves with a credit card, but I find credit cards a valuable tool that pays me back 1 to 3% on purchases.

    • Erik Folgate

      Skirnir,

      All good points. Every airline and hotel in the world will accept a debit card. There are a few rental car companies that won’t accept debit cards, but I would just not patronize those that won’t accept them. As far as online ordering, if you are worried about identity theft, if you use a debit card with a visa or mastercard logo on it, you have the EXACT same protections as you would with a credit card with the same logo on it. I hope that helps you out. My wife and I travel a lot, and we never use a credit card.

  • http://thesavedquarter.wordpress.com The Saved Quarter

    Wow, that is just RIDICULOUS! I can’t believe the author thinks it’s more important to pay off unsecured debt than maintain your shelter. What good is it to be homeless without any credit card debt?

  • http://www.insweb.com/home-insurance/home-insurance.html Robert

    The only time “forget the mortgage” is good advice is when your heart is about to explode unless you fork over your life savings, and then some, for a transplant.

  • Connie

    Well, I don’t think I am advocating to pay your credit cards over your mortgage is a great idea. BUT America is a no recourse mortgage zone, right? So if you are so badly out of whack that you cannot pay both and you know that bankruptcy is an inevitability (in the near term) why would you pay on something that will not be a part of the bankruptcy (the mortgage) as opposed to something that will (the credit cards). You will be bankrupting for less money and you may be able to work something out in a chapter 13.

    Would the laws force a sale of an underwater house in chapter 13 if you couldn’t pay for the mortgage and your chapter 13 payment?

  • http://www.maketodaypayday.co.uk Kate

    I can’t believe that people would think paying off a credit card before a mortgage was a good idea.

  • Karmella

    I recall reading/hearing another piece of information pertaining to this point of view – I can’t say for sure it is accurate or quote the source – and that’s the idea that banks won’t work with borrowers to restructure an existing mortgage until it’s at least 3 months behind.

    I don’t think the article was giving advice so much as commenting on how different a mindset this is. Not that I’m saying it’s a good approach or a sound strategy.

    I don’t have personal experience with having to choose between paying a mortgage or credit cards. I think though that when it comes to that point it’s probably more of a survival mode decision than a reasoned financial decision. And I can’t say it doesn’t make sense to think that if you’re current on the credit cards at least it’s access to a way to buy goods/services, but your house can’t offer the same.

  • ctreit

    Times sure have changed. For example, Celia Chenof Moody’s Economy.com correctly diagnoses that, “They don’t see any value in putting money into an asset that has lost that much value and will probably never regain that value to offset the mortgages.” She is not saying that house prices will never regain their value but she is only saying that this is what people believe. And these are the same people who believed until a few years ago that house prices would never go down, no, that house prices would appreciate by 20% each year. They were not the only ones who bought into the hype. Banks, politicians, the media, financial professionals, they all bought into this thinking. And now these same people consider it equally rational that house prices will never ever regain their value again. I agree with you that such fads in our beliefs are just ridiculous and it is best not to buy into them.

  • Carly

    I’m a little surprised at your rigid hatred of credit cards. I don’t see the problem with using a credit card regularly if you pay off the full balance every month. For me it is a matter of convenience and even helps me see what I spent my money on every month by going back and looking at the statement (not to mention modest cash rewards for using it). As long as you don’t think of the credit card as free money and a way to spend more than you currently have, I don’t understand why they are evil. Am I missing something?

    • Erik Folgate

      Carly, the reason i don’t like credit cards is because they don’t help you win with money. If you put all of your purchases on a debit card, you’d get the same convenience of seeing what your spent money in your monthly statement. Some people have the discipline not to carry a balance on their credit cards, but statistics are overwhelmingly in favor of most credit card holders carrying a balance from month to month, which means they’re paying a ton of interest per year. Also Carly, the minute you slip up and don’t pay your bill on time, they will slap a late fee, increase your interest rate, and the rate of every other card just in case you do carry a balance one month. Play with snakes and you’ll probably get bit at some point.

  • http://everythingishistory.com Tamahome Jenkins

    I’m not surprised at this garbage. These are the same people that thought it was a good idea to give people who make $8/hr. a $400k mortgage. It’s all a part of the plan. As long as we owe them (the banks) money, they’ll never be broke…

  • KPalmerFi

    I stopped paying my mortgage in May 2009 because I was stuck in an impossible situation: an ARM with an upper limit of 22% that kept going up, and no possibility to refinance because the bubble burst! I was paying $2500/month for 1600 square feet of living space. The mortgage companies said, “We cannot help you unless you stop paying,” so I stopped paying.

    Now they’re saying, “You can afford your mortgage, you don’t qualify for any rework programs, start paying again,” but the house is now worth 40% less than when I bought it and I am trying to move, anyway. There are so many homeowners in this same situation — just walking away from their mortgages. Are they really going to sue all of us?

    I have paid over $90,000 over 5 years on a house I bought for $250,000, and I still owe $250,000. It’s not fair, and it’s not getting me anywhere to keep giving all the money I make to the banks!

    • Erik Folgate

      KPalmer, I’m really sorry to hear about your situation, but it’s 50% your fault for signing up to a mortgage that you didn’t educate yourself about and it’s 50% the fault of the bank for having unscrupulous lending practices and putting you into a mortgage that wasn’t a good option and one that you couldn’t afford in the long-run. Please think of it on those terms, because if you begin to think that it’s all the bank’s fault for what they did to you, you’ll never learn from the mistake you made. If you can’t afford to pay the mortgage and feed your family at the same time, then yes, you have no choice but to stop paying the mortgage. My whole point with this is that people are thinking of the choice between paying their mortgage and not paying it based on a financial equation. We’ve GOT to stop thinking about it from a financial standpoint and from a practical standpoint. Do you want to leave the area? Will you ever be able to refinance again? (yes!) Will the value of your house come back up? (yes!)

      Just as the market was artificially inflated a few years ago, it’s artificially deflated now. We must stop thinking of our house in terms of how much it’s “worth”. It’s only worth what someone is willing to pay for it. Palmer, if you couldn’t afford to keep your basic needs in tact by paying this huge mortgage payment, then you did the right thing by stopping payments.

  • http://www.fiscalfizzle.com/ Wojciech Kulicki

    Let me play Devil’s advocate for a minute, in a comments section that looks like it’s going to eat me for this one! :)

    This article caught my eye last week too, but I didn’t get quite this strong of a vibe from it! I didn’t think the “journalist” was advocating for paying off credit cards at all, but simply commenting on a potential shift in consumer thinking.

    In all honesty, it makes sense to me–given the same situation, I might choose to think very-short-term too, and keep my credit lines open to feed my family, rather than “sink” money into a mortgage. The fact that it’s unethical, unwise, etc, etc. is irrelevant to many people who are just trying to make ends meet “for now.”

    Also, I don’t think the “would you rather be homeless?” argument holds water. The majority of places will rent to you these days, even after a foreclosure on your credit record, and those who are “strategically defaulting” clearly know that they will have to move out sooner or later. They are just buying themselves some time.

    Having said that, would I give this advice to anyone else? Probably not. But then again, I’m not in that situation. It’s a tough choice to make. The fact is, people are regarding foreclosure more and more as an “option,” not as something catastrophic. Whether that’s good or not is another discussion, but the perception is there. “Everyone’s doing it” definitely applies in the case, as bad as that sounds.

    I just don’t think we can be so one-sided and absolute to say that “never walking away” is the right choice for everyone. I’ve learned that much about personal finance in the last year–nothing is ever the “proper” way of doing anything! :)

    • Connie

      Here here. ( or hear hear…don’t know which hear/here)

    • Erik Folgate

      It’s so much easier to advise someone to walk away from a home when you’re not the one that actually has to do it.

      • http://www.fiscalfizzle.com/ Wojciech Kulicki

        I don’t think anyone is advising that people walk away (including the author of the piece). I think the key concept is that it’s a personal decision that is being made on an individual level, and that the dynamics of the forces that influence that decision are changing. Listening to personal finance “experts” about what to do is a bad idea anyway…but that’s a topic for another day.

        I know three people personally that have walked away from their homes, and know intimately about the reasons they chose for doing it. With that understanding, the original article made a lot of sense to me. But maybe I’m off on this one…

        • Erik Folgate

          I don’t think anyone is a bad person for walking away on their home. I have a very close friend who did it as well. My problem is when articles like this make it sound like it’s now becoming the “right” thing to do or that it’s a viable option. The whole article just made it seem like forgetting about your mortgage and paying your credit card bills is the easier thing to do. It’s not the easier thing to do when you need to find another place to live, find a landlord that will accept you even after foreclosing on your place, uprooting your children, etc.

          Woj, please don’t take me the wrong way on this, but after reading your article and your comments, I still have no idea where you stand on an issue like this. Maybe that’s your point, that there’s no clear-cut answer to an issue like this and it should be case by case, but I am okay with being absolute on the fact that if at ALL possible, pay your mortgage before your credit cards. Because your shelter should always be a higher priority when you are put in a dire financial situation.

        • http://www.fiscalfizzle.com/ Wojciech Kulicki

          Yeah, I agree–it is definitely entering the mainstream mindset, and that will be dangerous going forward. Easier to do? Probably not, you’re right. But some people also see it as taking the proverbial load off their back, so they believe it will make life easier. Reality might not be so kind.

          I’m glad you don’t have an idea, because I honestly don’t either!! :)

          In all seriousness, I would also say that if possible, pay your mortgage. It’s just a tough cookie for many people to swallow right now, and I can see the appeal of “taking the easy way out.” (Again, back to the perception of short-term gain).

          I’m more of a long-term perspective kind of guy, so I’m with you on the shelter issue. I also don’t see the value of a home as being relevant to what you’re paying for it (since you’re still paying now what you were willing to pay 3 years ago). That’s a bit of a simplification of the complexities of home ownership, but it holds water most of the time.

          We’ll see how my feelings change when WE actually become home owners… :)

        • Erik Folgate

          yeah, i agree with you that it’s definitely a complex issue, but I like opening the discussion up to people like you and others, because I end up learning a lot more than I ever did from reading other articles. Thanks for participating in a good debate.

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  • http://www.enemyofdebt.com Brad

    In June 2008, I watched a segment where Diane sawyer was surprised by the fact that Dave Ramsey and Clark Howard suggesting to pay your credit cards last. Diane Sawyer had this “Are you kidding me?” look on her face as if what they said was stupid. It fired me up so I wrote a post about it.

    To put your credit score above having a shelter over your head is unbelievable, but unfortunately so many people fight to maintain that score even if it means losing other, more important stuff. Most of them also have never heard of an emergency fund so in order to use what they have been told to use in case of emergencies—-their credit cards—it makes perfect since to them to pay their credit cards first. BACKWARDS! (Using credit cards for emergencies is BEYOND ridiculous!!)

    Erik, great post man! I too, HATE credit cards! I am about to host a blog debate called The Great Credit Card Debate, where I will have two opinions on the subject posted on my blog and another as a form of debate. I would love to have you join in on the fun! I will probably start it in March sometime.

    Carly – I understand your confusion, especially since you seem to be one of the people not spending more than you make. Erik is right though in that most people do not have the ability to use credit cards without abusing them. It is because of that, that we choose not to play with snakes. Snakes bite, it’s just a matter of time.

    You claim that it makes your life easier but Erik has pointed out something most people fail to realize or they just plain ignore. Debit cards provide some of the same benefits that you spoke of, IF you swipe them as credit instead of debit. I have lived without credit cards since 2008 and I have not had any trouble at all. If or when I do, I am still okay with choosing to rid my life of something that is completely unnecessary for me to win with my money.

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