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What is the Relationship Between Credit Cards and Mortgage Delinquency?

posted by Melissa Jacoby

Previously I mentioned this new paper on homeowners in bankruptcy in the American Bankruptcy Law Journal. The central goal of the paper was to investigate what makes homeowners more or less likely to have mortgage troubles as they head into bankruptcy. One of the notable findings is that, across all the models, credit access had a significant effect on keeping mortgages current and avoiding foreclosure initiation (specifics listed pp. 302-304). But why?

The study cannot say for sure, so the discussion section (pp. 308-10) explores several hypotheses.  Maybe those with continued access to credit cards had better credit histories and were in a stronger relative financial position. Perhaps credit cards filled in other financial gaps so that a debtor could keep a mortgage current.   After all, a quarter of filers who missed mortgage payments specifically reported using credit card cash advances as a method of catching up in the two years prior to filing. 

But other studies connect the dots differently.  For example, some researchers have examined the circumstances under which homeowners prioritize credit card bills over mortgage payments, increasing the likelihood of delinquency. And, before the financial crisis, some authors raised concerns that homeowners put homes at risk by using cash-out refinancing to pay credit card debt.  

Some caveats are in order.  The paper fully explains the limits of the data and our analysis, and is looking at 2007 bankruptcy filings, so the world looks different today.  But if you have a favored hypothesis for this set of findings, please share!   


I would lean towards the hypothesis that credit cards act as financial buffers, thus allowing homeowners to remain current for a bit longer. There is some evidence already that consumers use credit cards as financial buffers. Gross & Souleles (Quarterly Journal of Economics 2002) find that when credit card limits are increased, most consumers increase their borrowing, even if they weren't already at their credit limit. That suggests that they are keeping a precautionary savings buffer in their credit cards. Also, Sullivan (Journal of Human Resources 2008) shows that many consumers use their credit cards more extensively when they become unemployed--they use credit cards to smooth out financial bumps.

It should be said that both the mortgage and the credit card delinquency rates have now fallen deep below their post-Lehman peaks. The difference is that, while the credit card delinquencies are now at a record-low level (and they keep falling), the mortgage delinquencies are still very, very high by historical standards.

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