Home Consumer debt How consumers prioritized debt payments during the pandemic

How consumers prioritized debt payments during the pandemic

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During the pandemic, U.S. consumers with mortgage, auto and credit card debt prioritized their home loan repayments, amplifying a trend already underway, TransUnion research shows.

The company periodically studies the “hierarchy of payments” in times of economic crisis.

This specific hierarchy, in place since 2017, has not only been maintained, but strengthened throughout the pandemic, according to Matt Komos, head of research and advice in the United States for TransUnion. The purpose of probing the hierarchy is to help various types of lenders assess where they stand with consumers holding multiple combinations of debts. A credit card lender might be less inclined to increase a consumer’s limit if it appeared to be heading into distress, given that cards come last, suggests Komos.

“These are complex dynamics and the more lenders understand, the better they can help serve clients and manage their portfolios,” says Komos.

(In the table below and others in this article, the lower the percentage compared to other types of credit, the higher the borrower is perceived to be a high priority.)

Consumers favor mortgages over all other major credit products

Credit product Late payment rate of more than 30 days * Q3 2020 Q3 2019 Q3 2018 Q3 2017 Q3 2016
Auto loans 1.13% 1.42% 1.37% 1.37% 1.23%
Credit card 1.95% 2.62% 2.40% 2.41% 2.12%
Mortgages 0.75% 1.28% 1.29% 1.40% 1.34%

* Arrears rate over 30 days to 12 months for borrowers with all three credit products.
Source: TransUnion

What is behind the mortgage bill favor

Multiple factors appear to be contributing to the current state of credit.

First, house prices have risen in many markets over the past few years, notes Komos in an interview with The financial brand, and it got stronger in the suburban areas when people started looking for housing in the suburbs. While not a universal trend, the desire to get out of cities is a factor and marks a reversal of an old developing trend towards returning to cities that was occurring before the pandemic and unrest. summer 2020 civilians.

Key overview:

TransUnion believes consumers want to protect the increase in equity in their home.

Second, TransUnion believes that hosting programs helped mortgage performance, with subprime and near-privileged mortgage borrowers benefiting the most as they were able to delay payments and maintain their accounts. At the height of the pandemic, major banks noted during earnings calls that borrowers often enroll in housing programs as a precautionary measure, but continue to make monthly payments.

Third, as auto loans have become the top priority in other times of economic stress, the pandemic has been a game-changer.

“The mantra ‘You can’t drive your house to work’ doesn’t have the same effect when millions of Americans wake up, shower, have breakfast, and take only a few steps to get to their desks home.”

– Matt Komos, TransUnion

Fourth, TransUnion consumer research indicates that mortgages are the most valuable because they are tied to a high-value asset. However, there is also a fear factor involved. More than half of consumers surveyed said they expect to receive calls from lenders if they miss a single payment, and one in five is worried about the recovery if they miss a payment.

The circumstances of the Covid-19 crisis differ significantly from those of the financial crisis and the Great Recession.

The crisis, triggered in part by mortgage problems and a sharp drop in prices, has seen borrowers favor credit card accounts over their mortgages. Homes that had developed negative equity were not seen as significant assets to hold compared to credit cards that provided a reservoir of cash. Auto loans took precedence over mortgages and cards as a priority because they were essential for most people to be able to continue working.

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Baby Boomers Embraced Mortgage Priority Earlier

Komos says there were generational differences in this part of the company’s research.

Among baby boomers, for example, mortgage payments became the top priority as early as the fourth quarter of 2016. Komos says this reflects the higher amounts of equity many baby boomers had accumulated in their homes at that time. -the.

“They potentially had more to protect,” says Komos.

In contrast, Gen X and Millennials didn’t embrace mortgage priority until early 2020, he adds.

Loan forecast:

TransUnion does not expect a return in lines and home equity loans as long as rates remain relatively low.

“Consumers are currently more inclined to resort to cash refinancing with a regular mortgage than to using a HELOC or equity loan,” says Komos. He adds that TransUnion’s research reveals that home equity loan delinquent balances continue to decline, with repayments outpacing new equity loan extensions.

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A look at tighter credit circumstances

U.S. consumers with all three forms of credit – mortgage, automobile and credit card – in actual use make up about 10% of the nation’s credit workforce, according to Komos. TransUnion’s research has also looked at other aspects of credit use.

An analysis, taken from a global study of the company, examines the impact of the Covid period on credit cards compared to personal loans. The company looked at payment models over a 12-month period, including whether they were more than 30 days past due.

Priority personal loans on credit cards

Credit product Late payment rate of more than 30 days * Q3 2020 Q3 2019
Credit card 1.78% 2.94%
Personal loans 1.11% 1.49%

* Delinquency rate of 30 days or more to 12 months for consumers who have at least one credit card and one personal loan. Source: TransUnion

In the United States, personal loans were preferred over credit cards when consumers had multiple credit cards. This continued a trend seen before the pandemic.

TransUnion saw a different pattern when consumers only had one credit card.

Priorities change when the consumer has only one credit card

Credit product Late payment rate of more than 30 days * Q3 2020 Q3 2019
Credit card 1.48% 2.62%
Personal loans 1.66% 2.36%

* Default rate of 30 days or more to 12 months for consumers with a credit card and personal loan. Source: TransUnion

“In these cases, credit cards were given priority during the pandemic, unlike the pre-pandemic preference for personal loans,” the company says. “This change demonstrates the increased importance of credit cards to consumers during the pandemic and the need to maintain access to this valuable source of credit.”

On the other hand, Komos points out, consumers with three or more cards, if in a hurry, can afford to miss a card rather than not paying their personal loans.


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