No products in the cart.
At the Front of the Line
It seems like a simple market shift. Reversing a longstanding dynamic, US consumers ranked their credit cards as having a “higher repayment priority” than mortgages.
This was the conclusion of a study released yesterday by Auriemma Consulting Group that was based on a survey of 430 credit card users last October.
But when you scratch a bit deeper, there are all sorts of possible ramifications in this change – or are there?
Auriemma believes the “repayment priority” has reversed because credit has become less available.
Issuers have cut credit lines, and cardholders are aware that missed or late payments can trigger rate increases or account closures. Cash-strapped consumers view their credit cards as their “lifeline,” necessary for juggling daily living expenses.
The consultancy offered a second, possible explanation. It said that the prevalence of home-mortgage modification programs means consumers view their mortgage payments as less important than their credit card payments. In other words, the government will bail them out of their troubled mortgages, but not replace the credit card they lose by missing payments.
The second explanation seems better than the first, in my view. If that is the case, can credit card issuers expect better payment performance? I traded some emails with Auriemma editor Nancy Stahl on the subject and we came to different conclusions. Stahl downplayed the “repayment priority” factor.
It’s quite possible that this attitudinal shift will be reflected in repayment rates, but it is only one of many factors influencing consumer behavior. Remember that the classic risk management criteria are both willingness AND ability to repay. Our respondents told us that their attitudes about the repayment hierarchy have shifted somewhat, but the huge increases in charge-offs that the industry has experienced in the last year are far more correlated with unemployment rates (i.e., ability) than with attitudinal shifts (i.e., willingness). In theory, you could isolate the effect in an “all-things-being-equal kind of circumstance,” but macro factors, like the state of the economy and the impact government programs, like HAMP, are dynamic variables that aren’t sitting still to allow us to measure the unique impact of this attitudinal change.
Good points all, but perhaps that assessment gives consumers too much, er, credit? For at least some population of consumers, repayment of debts is done in a less-than-analytical fashion. It boils down to need. “Do I need to repay this debt or not?” is most likely the extent of consumers’ analysis as they face their bills on Sunday evenings. It seems unlikely to me that a reprioritization will not have at least some beneficial effect on credit card performance. Will the effects be great, say better than a few basis points? Probably not. But at the least, credit card issuers should get a basis point or two bump in performance.
That said, Stahl is right that HAMP is a great variable in all this and should it be curtailed or eliminated, that repayment prioritization will shuffle again. Forget trying to put your finger on the pulse of the market – use a tourniquet.
Please login to join discussion
