Has Access to Credit Replaced Homeownership as the American Dream?

Americans are staying current on credit card payments while allowing mortgage payments to fall behind, a credit card debt avoidance trend sustained for three straight years, according to a study released by credit agency TransUnion last week. The study, which examined consumer debt management decisions between third quarter 2006 and fourth quarter 2010, showed that 7.24% of consumers were current on credit cards but delinquent on their mortgages in Q4 2010, while 3.03% were current on their mortgages but delinquent on credit cards in the same period.

The choice to pay a credit card bill before a mortgage payment defies conventional wisdom about consumer priorities and the American dream. Analysts have repeatedly expressed surprise about the trend since it first emerged in 2007. TransUnion itself seems eager to call an end to it, announcing “change may be on the horizon” in its press release about the study.

Those who are hopeful that the new “payment hierarchy” is an aberration cite the 7.24% figure, down slightly from the peak of 7.4% in Q3 2010. They also point to California, where “the percentage of consumers delinquent on their mortgages and current on their credit cards decreased for the second consecutive quarter” in Q4 2010.

However, other data from the study suggest the trend is still going strong. Among the lowest scoring segment of consumers—those at highest risk for default—the current-on-credit-cards/delinquent-on-mortgage percentage reached 30.4 in Q4 2010. Meanwhile, the Q4 2010 percentage of consumers who were current on their mortgage but delinquent on credit cards dropped to new lows in California, in Florida, in the lowest scoring segment, and in the population at large—in other words, in every segment profiled by TransUnion in its press release.

What does it mean? One possibility is that consumers are simply making a savvy decision in response to economic conditions. In fact, Americans began paying off credit cards more aggressively as early as 2005. The trend emerged well before the housing bubble burst, during a period when interest rates were rising, and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was being enacted. Paying off high interest credit cards and debt made good sense.

Another train of thought argues that Americans are addicted to their credit, and they can't shake the monkey off their back. After all, as this reasoning goes, many consumers used their home equity exactly like a credit card in the easy credit days before the downturn, using home equity loans for luxury purchases or simply to move debt around, thus freeing up space on their credit lines to continue to buy. Now that home equity lines of credit have dried up for many Americans, they've turned back to their credit cards to maintain a lifestyle that is simply beyond their means.

But perhaps there's a third possibility. Just before TransUnion released its study, the real estate world was abuzz about a different study. Entitled “Lessons from Over 30 Years of Buy versus Rent Decisions: Is the American Dream Always Wise?” that study concluded that in many situations, renting is a better financial choice than buying. The authors, two finance professors, observed that Americans are more mobile than residents of many other developed economies, a lifestyle that can be at odds with home ownership. In our mobile, rapidly changing world, where job prospects are uncertain and fewer Americans have health insurance, it might be that access to credit—which can buy groceries, or cover an unexpected medical procedure—is replacing home ownership as the American dream.

About the author

This is a guest post from Dawn. Dawn is proficient in all things finance and frequently writes about credit cards for bad credit and the road to financial freedom.

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