Tapped out of home equity, more Americans turning to credit cards

In a sign that U.S. households are not bringing in sufficient income to cover living expenses and debt payments, many are increasingly relying on credit cards as home equity lines become drawn down, frozen or harder to get. But the biggest change from the past is that mortgages have lost their first-tier position in terms of payment priority in favor of paying car payments and keeping credit cards current. From a USA Today story:

Credit bureau analyses of consumer payment data show that financially squeezed borrowers have begun paying their credit card and car bills before their mortgages. That's a striking reversal from the norm, one that reflects rising desperation. It suggests that some people essentially have given up trying to stay current with their mortgages and instead are focused on using credit cards to squeak by.

If the trend persists, many economists say, it could accelerate mortgage losses and further drag down the economy.

Rising living costs, along with cheap and plentiful credit, have led consumers to rely more on plastic to pay for necessities they can't live without — and luxuries they don't want to do without. But as the economy weakens, consumers are starting to spend less on discretionary items, such as furniture and electronics, and more on such necessities as groceries and gas, according to government data. Such items increasingly are showing up on credit card bills...

Magnifying the problem has been the shrinking availability of a major alternative to credit cards: home equity loans. As home values have sunk, homeowners have found it tougher to qualify for such loans. So they've turned elsewhere, especially to credit cards, to cover daily expenses...

The danger is that "The economy has relied on the consumer to keep it afloat for the last seven years, and there's no more gas in the tank of the consumer," says Howard Dvorkin of Consolidated Credit Counseling Services in Fort Lauderdale. "They've got nothing to give."...

During the housing boom, too many people took out mortgages they couldn't afford. Many now owe more on their houses than they're worth. Some are defaulting on their mortgages — figuring they'll lose their homes anyway — even as they keep paying credit card and auto bills, credit counselors say.

"A lot of people are exhibiting a kind of fatalistic behavior to their mortgages," says Douglas Hammond, outreach programs director at Alliance Credit Counseling. "They can't make their mortgage payment, so why (try to) make it at all? 'Let's keep my car, make my payment on my credit card, so I have some way of feeding my family.' "

When consumers are "pushed to the wall" and forced to choose between paying the mortgage or credit card bill, Chessen says, those who are likely to lose their homes may choose their credit cards, because "They still need to heat their homes, put food on their tables and fill their cars with gas."...

This reversal in payment priorities helps explain why the rise in credit card and auto loan defaults — which occur when lenders give up trying to recover a debt — hasn't matched the pace of mortgage defaults. Credit card defaults, while rising fast, are still in line with historic averages.

As the economy has worsened, card issuers have become more selective about offering credit to new customers, and in a growing number of cases, are shrinking card holders' credit limits. Yet they're still sending more solicitations to existing credit card customers. In 2007, issuers increased their solicitations to existing customers by 15.6%, advertising rewards and other perks to promote spending, according to Mintel, a firm that tracks such mailings.

Subprime customers — among the most profitable for banks because of the high rates and fees on their cards — saw a 41% jump in direct-mail credit card offers in the first half of 2007, the latest period for which figures were available, compared with the same period the year before, Mintel found.

It's a matter of time, some analysts say, before financially squeezed consumers max out their credit cards and start defaulting in larger numbers.

"My guess is that you'll see increasing numbers of people walking away from credit card debt the same way that they're walking away from the mortgages," says Ken McEldowney, an executive director at Consumer Action, a consumer advocacy group.