Pay Your Card But Default on Your Mortgage?

In a new report bound to disturb those hoping for a comeback in the real estate market this year, TransUnion reveals that Americans across the board are opting to keep their credit card payments up to date while allowing their mortgages to go into foreclosure. I can't for the life of me understand the thinking behind this strategy, though I suspect it has a lot to do with the fact that 25% of American mortgages are under water and this trend is merely a precursor to another wave of homeowners leaving their keys in the mailbox and walking away.

So it got me thinking. When I was younger and in school, there was no such thing as a personal finance class. Responsible financial management was completely ignored by academia (of course, back then if a college kid applied for a credit card the application would've received the same reception as Aleksey Vayner's resume). It was a seriously big deal for me to get approved for an AT&T calling card with a $200 limit when I was 19. (Try to imagine a world where there were pay phones everywhere and everyone used them.)

Do the schools today do a better job preparing students for real-life finance? I've heard of high school kids with credit cards now, and I think it goes a long way to explaining this depressing chart. To put it into perspective, 4% of the world's population holds 40% of the world's personal debt. How did we get here?

I'm really looking for some insight from both industry vets and college kids. In what bizarre world does it make more sense to make a credit card payment (unsecured debt) instead of your mortgage payment (secured debt that keeps a roof over your head)? And are the schools better preparing young people today so this situation doesn't get worse?

 

Just found this NY Times article on this very subject from two days ago. Looks like more and more people feel it is their right to walk away from an upside down home:

In 2006, Benjamin Koellmann bought a condominium in Miami Beach. By his calculation, it will be about the year 2025 before he can sell his modest home for what he paid. Or maybe 2040.

“People like me are beginning to feel like suckers,” Mr. Koellmann said. “Why not let it go in default and rent a better place for less?”

 

I think colleges in general do a horrible job preparing the average student for debt and personal financial management. Especially when you have Credit Card firms in the Union offering free stuff to sign up. At the end of the day even if the schools were to implement a Personal Finance course would things really change... No. People will make bad decisions and have to learn the hard way. Its life.

 

I read a similar article a while back and the reason people gave for leaving their homes while keeping the Credit Cards was a combination of cash flow and underwater mortgages. They needed the flexibility that the credit cards provided and while they were still underwater with their primary mortgages they would buy a cheaper, more reasonable second home and then default on the first one.

I tend to agree with what jhoratio says about consumers acting like big business.It is coming down to the point where consumers feel ripped off and they are deciding to renegotiate the terms of their debt.

 
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