A recent article (link no longer active) from US News & World Report shed light on an interesting phenomenon occurring in the world of personal finance–a noticable shift in U.S. consumer behavior that prioritizes credit card debt over mortgages.

The statistical shift is significant enough for people to take notice:

“…the percentage of Americans who were current on their credit cards but behind on their mortgage increased to 6.6 percent in the third quarter of 2009, up from 4.3 percent in the first quarter of 2008.”

Bankers are shaking in their boots:

“Before the housing crisis, bankers typically operated under the assumption that homeowners would do whatever possible to remain current on their mortgage–even if that meant falling behind on other bills…”

Not the case anymore. The article cites a number of reasons for this recent phenomenon; many are deeply rooted in some of the underlying causes of the recession:

People don’t want to throw good money after bad, continuing to fund assets that are underwater, and were often purchased with little or no equity.

Credit is being used to flexibly finance everyday expenses when there’s a cash shortage, something a house can’t do.

For a home, the time between a late payment and final foreclosure can stretch out over more than a year, providing a much-needed stop to most families’ largest expense. On the other hand, falling behind on credit cards results in a quick lock or closure of the account.

That’s a good start, but I wanted to dig deeper. I have a few more potential reasons for this phenomenon, as well as some curious observations about the whole thing:

Foreclosure is no longer shameful. It used to be that you were looked down on if you somehow overreached in your home purchase and ended up losing everything. Simply running a mortgage calculator is a great start, but is no longer sufficient on its own as a way of determining affordability. Now, I bet every one of us knows at least one person going through the foreclosure experience. It makes it very real and very serious, but it also brings a spirit of camaraderie to people that are going through it. And from my own experience, many even wear it as a “badge of honor.”

Banks are being demonized. Political discussion aside, it’s pretty clear that many people hold the banks at least as equally at fault as the homeowners who overreached. The result is a “stick it to them” attitude, whereby people are simply sick of not only throwing in money to a dead asset, but doing so to a financial institution that they despise.

Credit cards are giving people a sense of self-worth, where there is none. Many people still find comfort and a sense of accomplishment in being able to buy things, even if that’s no longer luxuries, but only groceries for the family. When it seems like everything else is crumbling down, this can feel so uplifting and even powerful. It’s very easy to fall into the trap of swiping a credit card and getting that ego boost.

People still view credit cards as necessities. Even the article I mentioned has this view (or more specifically–a quote), but I believe that’s not the case. Many personal finance bloggers have shown easy work-arounds to the most commonly cited “needs” for credit cards. Many have also closed all of their credit accounts for good. Unfortunately, when the public still views plastic as a must-have, they will be more willing to do everything to keep it.

It’s clear that people still look out for #1. We can talk about ethics, “doing the right thing,” the public good, and all of that all day long. But it’s clear to me that when push comes to shove, in times of real financial stress or desperation, people are going to look out for no one else but #1. Given a choice between two or more financial options, they will pick the one that benefits them the most, even if it means screwing someone else. Now, that really scares bankers. And it’s unfortunate for those of us who will be looking to buy in the next few years…but it’s only human nature.

What would I do in that situation? It’s tough to say–given my thoughts on the subject, I would probably try to keep the house first and worry about rebuilding my credit later. But there are so many nuances to each situation…

Balance, one of my favorite financial principles, hardly applies in this case–you can’t really pay half of your mortgage and credit card bills if that’s all the money you have.

What do you think? Do you see other potential reasons for this trend? Do you know someone who’s had to face the choice? What do you think you would do given an ultimatum between one or the other?

Photo by respres