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Let me start off by saying: I hope you never find yourself in this difficult situation!
Life gets really stressful when money is tight. People get sick, layoffs happen, and the household income drops due to unforeseen circumstances. When you find yourself short on cash, which do you let be late: The mortgage or credit cards?
According to TransUnion, one of the major credit reporting agencies, more Americans choose to pay their credit card bills to keep from being late than keep a mortgage current.
Is this wise?
Let’s walk through a few scenarios to expose the pros and cons of each option:
Paying the credit cards but not the mortgage?
Benefits: Staying current on your credit card will reduce the number of incoming calls from creditors, avoiding stress.
Disadvantages: Catching up on skipped house payments is not as simple as credit cards. Lenders will send a check back that does not include the entire amount of missed payments and late fees.
As each month passes it becomes harder and harder to get caught up and in only a few months you could find yourself in a death spiral (or what I call a debt-spiral).
Oh yeah, and your credit is shot.
Paying the house while being late on credit cards?
Benefits: Your house is home base. It’s where your kids sleep and you can regroup to fight another day. Simply knowing you have a place to rest your head is a huge relief.
As mentioned earlier, it’s also much easier to stay current on a mortgage than to get out of a debt-spiral. And finally, mortgage payments are weighed heaver in measuring credit worthiness than other debts.
Disadvantages: Not paying a credit card will trigger an unbelievable amount of collection calls. Not only that, a late payment (or no payment) may trigger a clause to allow interest rates to jump to an unconscionable level.
And, of course, your credit report fills up with red boxes indicating late/no pays. Not good.
You have rights, even if you don’t pay
Just because you didn’t pay your bills this month doesn’t mean you give up your rights.
The Fair Debt Collection Practices Act does allow creditors to contact you between the hours of 8am and 9pm but it also restricts them from “causing a telephone to ring or engaging any person in telephone conversation repeatedly or continuously with intent to annoy, abuse, or harass any person at the called number” (§ 805).
In other words: even if you owe them a million dollars, using harassment to collect a debt is a violation of Federal Law.
Use this to your advantage: Keep a notepad by your phone and record dates, times, and name of every creditor that calls. If they break the rules, let them know.
If they continue this bad behavior then exercise your rights; Contact a lawyer and sue their misbehaving b-hinds!
But most importantly: Communicate
No matter what the scenario, remember this: COMMUNICATE WITH YOUR CREDITORS. Don’t wait for them to sick the attorneys on you to start explaining what happened.
Tell them you are willing to make the payments; you just aren’t able to pay right now. Being late on bills sucks. Getting sued because it’s the only way creditors will get paid is a nightmare.
It will take more than one phone call to make any progress and you’ll probably have to ask to be escalated to a supervisor. Remain diligent – this is your life we are talking about here!
Recovering from missed payments
Once you get back on your feet you can work out a deal with the creditors. They just want their money so let’s work out a deal where we honor our agreement and they get their money.
Ask your mortgage lender to modify or “rehab” the account. It won’t happen in the first call but they do want to work with you. They may ask you make one and a half payments for a period of time or roll the payments to the end of the term. Keep communicating and work out a deal you both agree with.
Most credit card companies don’t begin legal procedures until at least 6 months of non-payment. Credit cards are unsecured debts so it requires a court hearing and a judgment for them to be able to do anything. (Remember this when the threatening letters and phone calls start pouring in).
Prevent this from EVER happening to you
It is possible to be ready for an unexpected job loss or furlough that would keep you from working and paying bills. Many people don’t prepare for these types situations but we know what happened in 2008-2009: Bad things happened to a lot of good people.
Here are three simple suggestions to prevent anyone from falling behind on payments:
- Save some cash in an emergency fund
- Pay cash for cars
- Use a debit card in place of a credit cards
Listen to how we travel and take vacations without credit cards or debt: http://moneyplansos.com/how-to-have-a-great-vacation-without-a-credit-card/
Having a couple thousand in the bank is a HUGE relief and could keep anyone from defaulting on a loan. Avoiding debt by using debit cards instead of credit is easier now than ever. Buying cars, not financing them, will eliminate a huge monthly burden and save you tons of interest.
So, which do you let be late?
What is the correct answer: Pay the mortgage or credit cards first?
The decision is up to you, but let me give you one piece of advice from 1 Timothy 5:8. It says “if anyone does not provide for his own, that is his own household, he has denied the faith and is worse than an unbeliever.”
If God says my first priority is to shelter and feed my family then it’s easy to choose the house over credit cards. My rights as a citizen affords me time to work out arrangements with creditors while I get back on my feet. Communication is the key to buying time when there’s no money.
My wife and I have taken the steps above to prevent something like this from ever happening to us. I hope our wisdom and experience has been transferred to you – and I pray you never find yourself in this type of situation!
Have you ever been late on your bills? What happened and what did you do to get out of it?
By the time most of us hit scary levels of debt, it seems impossible to attain the advice you give – like saving for an emergency fund or paying cash for big purchases. But it is possible. We were in scary debt in 2010 – with a debt-to-income ratio of 3.5. Now, four years later, we’re down to 1.5. AND we have a small emergency fund. AND we paid cash for our new roof last summer. It can happen!
Way to go Prudence! Keep going and make that debt-to-income ratio go to -3.5.
Ok, so a negative value isn’t really possible but you’re proving that you can do the impossible by getting out of so much debt!
I would pay the mortgage first without even thinking about it. Like you said, it’s our home base. It’s one of the fundamental necessities in life. Creditors can call and harass and sue….but I’d still have a roof over my head. I like that you emphasized communicating with your creditors – you never know how far they’ll go to work with you (although in my experience, it’s not all that far…..)
Thanks Travis. I guess you could call “communicating with your creditors” a part-time job if it “pays” well enough 🙂
Great post Steve! I did a similar one a few months back on some report that came out saying people are paying their car payment first. That said, when I was in debt I missed a number of credit card and student loan payments. It mainly went back to me being stupid and thinking that avoidance was the solution. If put in the situation again, which will never happen if it’s up to me, it would be the house that’s paid first. The issuing banks could do what they wanted, but we’d still have beds to sleep in and a roof over our heads, which would be the most important.
Hey John. Missing payments sucks, doesn’t it? I remember the last (hopefully) payment I was late on. It was 7+ years ago. My wife had a credit card and gave me her statement. I filed it in the bill drawer. I pulled it out of the drawer the day it was due. Gah! >Knife in the heart<
I felt like a failure and it was all because I wasn't paying attention. #neveragain
I would probably ask for a personal loan from family. I know that creates a sticky situation, but my family also knows that I’m incredibly dependable. Hopefully dependable enough that I’ll never have to face this kind of problem in the first place.
Borrowing from family sounds like a viable solution until you’ve done it.
#Testimony: I borrowed $5,000 from my parents 20 years ago. It wasn’t for a car or student loan, it was to buy my ex-wife out of the condo we owned. Not only was I heartbroken but I was now in debt TO MY MOM because I didn’t have $5,000 to my name!
I tried to make $200 payments every month, would ask to skip a month or two when things got tight, and they eventually forgave the loan a couple years later. It’s funny how I still feel indebted to them after all this time. Well, maybe “funny” isn’t the right word. Actually, it’s not funny at all.
I hope you are never in that situation Stefanie. Love your Mom well enough to have a healthy savings account for those big unexpected emergencies.
I’ve been fortunate enough to never be in that situation. I’ve been a couple days late on something as an oversight, but not because I didn’t have the money. It must be really tough to be faced with that kind of either or situation. I’m not really sure what I’d do. 🙁
You haven’t? Awesome.
I’ve done the “weekend float” before: Placing a check in the mail on Thursday knowing that I would be depositing my paycheck on Friday, all-the-while hoping USPS wouldn’t let the envelope land on my creditor’s desk until Monday. It’s quite different now with bank BillPay and the only payments are monthly bills (electricity, cable, cell phone, etc) and our mortgage. I’ve almost forgotten how it was to juggle 3 credit card payments. I don’t miss those days at all.
I wouldn’t let either be late. If I did not have enough cash to pay everything on time, I would use my credit cards to make ends meet. A cash advance if necessary, but a better idea is use the credit card to pay for utilities, gas, and/or groceries, then use the money allocated for those items to pay the credit card minimums. Not ideal, but better than going into default, assuming the problem is temporary.
I guess that could be a solution Petunia. The mortgage and car payments are also debts, so moving the payment over to a credit card doesn’t get you ahead but at least you wouldn’t have a missed payment. Of course, it postpones the debt payoff and would likely cost someone more interest than the original debt (which also included interest) – but it would get someone out of a pinch.
I’ve been late on bills before but never mortgage or creditcards. Given the situation though, mortgage would trump credit cards 100% of the time. If I was in that situation (though i haven’t I was close to making those decisions) I’d be seeing help asap!
YES! 4-walls over unsecured debts every time!
I would hope to never have to choose, but I’d always pick the mortgage. Always pay secured debts before unsecured ones. It might wreck your credit to not pay the cards, but you’ll still have a place to sleep.
YES! You’ve got your priorities straight Kim.
Geez, we could have just used your comment instead of my 700+ word article.
Great question!
Hands down the mortgage has to be paid first. The scripture you used was on point!
If you lose your home, there are a whole lot more problems that can spiral from there.
Take care of the basic necessities first: food & shelter
Make paying credit cards a priority, but not THE priority.
While debt collection calls are not fun….you do have the right to request they only contact you in writing. I would warn that if you do this, however, you keep your paper trail.
Even when I accidentally missed a payment on a credit card, I contacted them right away, and they were willing to dismiss the late fee. I think keeping in contact with them at least lets them know that you are aware of the situation and you are trying to remedy the problem