Alaskans run up big credit card bills and pay them off fast. People in Michigan keep up their on auto loans even when all else is going to hell. Nevada debtors — and, increasingly, the rest of the country — will let the mortgage slide before skimping on a credit card bill.
No two people pay their bills the same way, of course, but it’s likely that your neighbors face many of the same economic and social pressures as you do. That results in distinct patterns reflecting local shopping habits, regional employers, even how often people move.
Those patterns show distinctly in data gathered by TransUnion, one of the three major U.S. credit-reporting companies, on loan delinquencies in the third quarter of 2009. The numbers draw a picture of Americans trying cunning new bill-paying strategies, ditching old wisdom and money taboos as they struggle to stay afloat and decide which accounts to pay first.
“We are seeing a shifting in the hierarchy of delinquency,” says Ezra Becker, the director of consulting and strategy in TransUnion’s financial-services group. In paying their bills, he says, people are abandoning the old wisdom about always paying the mortgage first.
Traditional thinking turned upside down
Historically, Americans have defaulted on credit cards first and auto loans second, reasoning, “I can walk or ride the bus.”
Only with great reluctance did Americans give up on mortgages. “Only in the most dire of circumstances did consumers used to say, ‘I really can’t pay my mortgage,’” Becker says.
The classic thinking: If all else fails, you need to keep a roof over your head.
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No longer. Today, people often are choosing to feed credit card companies first. With falling home values and mortgages with resetting payment amounts, plastic is fast becoming the primary source of emergency household liquidity.
People figure, “I can’t buy groceries with my house,” says Becker. He calls it “a subtle but really dramatic impact of the recession.”
The extreme example is Nevada, with the worst rate in the country in the third quarter — 14.53% — for mortgages delinquent at least 60 days.
And yet, at the same time, Nevada’s bank card delinquencies were only 1.98%. True, that was also the highest rate in the country; Nevada is, after all, a state with many people in serious financial trouble. But it’s a perfect example of people trying to keep their heads above water by paying their credit cards first. “Twenty years ago, if you asked the average consumer, ‘Would you ever consider making credit card payments at the expense of your mortgage?’ people would say, ‘You’re nuts,’” Becker says.
Now, the logic is different: If you’ve got a $500,000 adjustable-rate mortgage that’s about to reset to a higher rate, if you’ve got no equity in your home or even owe far more than it’s worth, if your friends are losing their jobs and if you hear that card lenders are going to be a lot more stringent in their lending policies, it’s not unreasonable to conclude that “I really need to keep my credit cards healthy, but my house is a lost cause,” says Becker.
What’s clear is that people are worrying less about the stigma of bad debt these days as they hunt for a plan for survival. Interestingly, consumers’ creditworthiness and their bill-paying tactics can vary quite a bit, depending on where they live.
Here are four examples:
1. Midwestern superiority?
If you judge people by their creditworthiness — and lenders do — those in the northern middle of the country, excluding high-unemployment Rust Belt states such as Michigan and Ohio, are the model of rectitude. According to TransUnion, the states with the best track records for paying bills are:
- Mortgages: Arkansas, the Dakotas, Iowa, Kansas, Kentucky, Montana, Nebraska, Oklahoma, West Virginia, Wisconsin and Wyoming.
- Credit cards: the Dakotas, Iowa, Kansas, Maine, Massachusetts, Minnesota, Montana, Nebraska, New Hampshire, North Carolina, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin and Wyoming.
- Auto loans: Alaska, the Dakotas, Montana, Pennsylvania and Wyoming.
Why Midwesterners seem such model citizens is a matter of debate, even at TransUnion.
“It’s because of their upbringing and their conservative nature when it comes to money,” says Clifton O’Neal, a company spokesman, who also points out that many Midwestern farmers buy lots of supplies and equipment on credit and pay off their cards promptly.
But his colleague Becker disputes the idea of Midwestern moral superiority.
Find economic data for your state
“I’m not going to talk about conservative upbringings or fiscal responsibility because we can’t really demonstrate that,” Becker says. “Besides, we are kind of a mobile nation.”
People in the Midwest have moved in from all over the country. And many people with Midwest upbringings are now scattered among the states without appreciably affecting bill-paying habits in their new homes.
Instead, Becker points to economic factors common to the states with the best records: When housing prices ran sky-high on the coasts, states in the middle of the country generally saw only modest increases. That meant there were fewer big accumulations of home equity to entice homeowners and lenders into the risky-loan frenzy.
Also, “the cost of living in the Midwest can be significantly lower than on either coast, but incomes are generally not that dramatically lower,” Becker adds. Midwesterners have not needed to stretch as drastically to buy or rent housing.
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