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Growing Use of Credit Cards to Make Mortgage Payment

Growing Use of Credit Cards to Make Mortgage Payment

Demos, CRL release report

October 20, 2005


photo of Coco Salazar
As the cost of living rises and wages stagnate, borrowers are increasingly turning to credit cards to pay their monthly mortgage payment, a new study by a consumer advocacy group says.

Those findings, derived from a national survey on credit card debt among 1,150 low- and middle-income households, were outlined in the The Plastic Safety Net: The Reality Behind Credit Card Debt in America report released last week by Demos and the Center for Responsible Lending.

“American families are facing financial hardship not experienced for generations, and we commissioned this survey to tell us precisely why they are turning to credit cards so often,” said Tamara Draut, a Demos director and co-author of the report, in the announcement.

National credit card debt has nearly tripled since 1989 and increased 31 percent since 2000 to $800 billion at a time when job instability and medical costs have largely contributed to bankruptcies almost tripling over the past 15 years to 1.8 million last year, the center announced.

The reported average credit card debt of a low- and middle-income indebted household is $8,650 with nearly three-fifths of respondents saying they were in credit debt for longer than one year, with the average length being just over three and a half years.

“The results are clear: wages have stagnated while medical and housing costs have skyrocketed, and if confronted with a layoff or health emergency there are few, if any, personal or public safety nets adequate enough to help in a crisis,” Draut added. “Households are turning to high-cost credit cards to keep afloat.”

It was found that 70 percent of respondents used credit cards as a “safety net” to pay for car repairs, medical expenses, house repairs and basic living expenses, such as mortgage payments, because they did not have money in their checking or savings account, according to the study.

Credit cards to particularly cover basic living expenses were reportedly used by one-third of households on average four out of the last 12 months. Those that had lost their job sometime in the last three years, were unemployed at least two months, and those without health insurance in the last three years, were almost twice as likely to use credit cards to pay for basic living expenses.

In the last three years, one-fifth of survey homeowners had paid off some credit card debt using proceeds from a mortgage refinance or home equity loan, reducing their home equity $12,000 on average, the center reported. Further, those 20 percent had an average credit card debt over $14,000 — resulting in carrying 18% more debt than homeowners who had refinanced a mortgage but not paid down credit card debt — even though the incomes of both groups were almost identical.

The reasons why those who paid down card debt with home equity proceeds ended up with higher debt were the “same ones discussed earlier: bad luck and lack of other traditional safety nets such as savings and unemployment benefits” to cover basic living expenses, car repairs, etc., according to the report.

“While in theory [using home equity to pay off higher-cost credit cards] provides families with a short-term solution of lower monthly payments, it often fails to address the long-term economic realities confronting the family,” the authors said in the report.

The authors pointed out that many refinance borrowers in the past few years have exposed themselves to more risk by taking on adjustable rate mortgages — 38 percent of prime mortgages and as much as 70 percent of subprime mortgages. Yet others have fallen prey to predatory mortgage loans, which have even more lasting and devastating consequences than a cumbersome non-secured debt burden.

“The danger of missing a mortgage payment means many families are risking their homes — a family’s most important asset — in order to pay off unsecured credit cards,” the authors wrote. “All of these factors lead to a crisis in personal finance: a blurred line between ‘productive credit,’ which helps to build wealth, and ‘destructive debt,'” which depletes wealth and erodes families’ financial security.

Coco Salazar is an assistant editor and staff writer for

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