Why paying off your credit card rather than your mortgage is stupid

It’s a common debate in debt that people prioritise in certain ways based on certain behaviours. A common one being that it is rational to pay off a credit card because that is what buys the shopping or puts fuel in the car.

The belief being that a credit card provides liquidity when needed, but in paying off this debtor first it brushes over two key facts.

1: If you told the credit card holder to go and jump for their money you’d be instantly better off by whatever you owed them, we regularly see settlements done for 10c on the Euro. This saving (assuming it equates to the missed mortgage payment – which is a leap of faith at best) could be used to fund the following month or two for fuel/groceries, and that isn’t to say you couldn’t repeat this process with a mortgage too as a source of financing if you had to, but doing it first is a mistake.

The first rule in personal finance is about prioritisation and while we regularly tell people to burn creditors, I can’t think of a single example when we said miss a mortgage to pay a credit card.

There are others who disagree as is their want, but unlike them we are a regulated financial advisory firm, members of our firm are qualified financial advisor’s, accountants, auditors, mortgage advisor’s and the like, we don’t have PhD’s, this is not an academic study for us, it’s real life and in real life you don’t support unsecured creditors.

There are those who say paying the credit card is ok but also that we should have burned unsecured bond holders… That is an inherent contradiction of terms in that as to how unsecured creditors should be treated.

2: If you miss a mortgage payment and pay zero as one bank has claimed over a third of their borrowers do. Then you aren’t ‘unable’ to pay, you are ‘unwilling’, even a payment of €10 shows a level of sincerity that will get a judge on your side should you end up in court. If payments (collectors relate this) go from say €900 to zero, then a wage cut usually isn’t the driver or it would go down by the wage cut amount (if it was a €900 wage cut then obviously it makes sense), that the loan goes to zero is a reflection of bad financial management.

This leads to a separate argument of whether or not an inability to make an adjustment is strategic or just bad management.

You are better off paying something to the mortgage lender and zero to the credit card, even from a cost of financing and settlement point of view. If you don’t pay a credit card or pay late their rates are 18%, use a missed mortgage payment as a form of financing and the rate is often only 1/10th of that amount (cost of financing), and while a credit card will often settle after default on 10c in the Euro, no mortgage will get a 90% write down (settlement point of view).

This all leads to the issue of strategic defaults which long before it became popular we had estimated was about 10% on home loans and up to 25% on buy to lets. AIB think it’s 20% across the board, in their defence AIB at least have some data from collections teams to work on which means those refuting it lack an empirical backstop. Equally, that AIB haven’t given any data, methodology or further inspection and have kept everything internal means that they could be taking a certain view which under scrutiny nobody else would have.

Even if everybody was allowed to look at the standard financial statements and bank accounts to determine who the can’t or won’t pay people are it would result in a dispute because of arguments like this, where one side says paying a credit card makes sense and the other doesn’t. For our part, as practitioners we don’t think it makes sense, others disagree.

 

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