Wise To Prioritize Credit Cards Over Mortgage Payments?

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The U.S. Census Bureau expects 188 million active credit card holders this year. Credit reporting agency Transunion says there is a growing number of Americans who are paying their mortgages late so they can pay their credit card bills on time. Host Michel Martin and personal finance expert Alvin Hall discuss whether or not logic exists behind this balancing act. They also review other important news in the credit world.

MICHEL MARTIN, host: I'm Michel Martin, and this is TELL ME MORE from NPR News.

As the Arab Spring turns to summer, we know how most Americans view the uprisings in Egypt and Tunisia. Americans overwhelmingly approved and respected those who stood up and demanded freedom. But how do Egyptians see those pivotal days and their lives now? A new Gallup report, just out today, tells us. We'll talk about it in a few minutes.

But first, back to this country about - and we want to talk about personal finance. Now, the chances are good that within the last week you used a credit card to pay for something - maybe multiple credit cards to pay for multiple items, in multiple stores. The U.S. Census Bureau actually has statistics on this. It expects that there will be 188 million active credit card holders this year.

We thought we'd take a look at some important news in the world of credit and credit cards that could have a direct impact on your wallet. Here to take a swipe at these latest developments is our money coach Alvin Hall. Alvin, always good to talk to you.

ALVIN HALL: Good to talk to you, and I'm ready to take the swipe.

MARTIN: OK. Now, let's start with what I think many people might see as a sign of the times - these numbers that show that many people, when faced with the dilemma of scarce resources, are more willing to pay off their credit cards than to pay their mortgage bill. These come from numbers from a credit reporting agency called TransUnion. It said that actually, that number has grown exponentially and in the last reporting period, it was actually a majority of the people who had fallen behind.

Now, why would someone do this? And is this a smart strategy if you have limited dollars?

HALL: It's a calculated strategy. Imagine that you bought a house that you paid $250,000 for and it's now underwater, worth $140,000. You are saying to yourself, well, I'm never going to be able to pay off this mortgage, and I don't want to pay off a mortgage when the house is worth less. But I still have to be able to put food on the table, pay for the phone, pay for gasoline, be able to get to work.

So people see credit cards as their safety net. Many of them have exhausted all the money in savings. They've tapped into their 401(k) programs. So this is the only thing they have keeping them, you know, sustaining them in their life. So, yes, there's a logic to it, but there's a very calculated risk involved.

MARTIN: Tell us about the risk. What's the downside of this approach?

HALL: People forget that the major way people build wealth is through home ownership. So if you lose your home, you fall off the property ladder and fall off the wealth-building path that is normal in America. The second thing is, how long will that foreclosure or loss of the house stay on your credit rating? And I think people look at past experiences of other people and they'll say, it might stay on my credit report maybe about two to three years. That's OK because I can rebuild after that.

MARTIN: But if you're talking about people using their credit cards, and staying current on their credit cards, to just pay for what a business would call operating expenses...

HALL: Yes.

MARTIN: The day-to-day money that you need to sort of keep yourself afloat, you know, are they wrong? Especially when they see themselves throwing what the common - the folk wisdom would say good money after bad. You're paying for an investment that is a fraction of the value that it formerly was. Are they really wrong?

HALL: They are really wrong. But they are also in a very difficult situation. And I think it's hard for people to imagine what it's like to be poor or have your back up against the wall. And what's more important to you is the shelter over your head, or putting food on your table. It's a real horrible position to be in, but I think they are wrong to do it because what it does, if your house is underwater, then you can understand and say, I'm never going to be able to afford a house. But if the house is not underwater, then people should focus on making the mortgage payments - or at least seek a modification.

MARTIN: At least seek a modification. OK.

The next topic is actually about credit. You talked about, you know, people have no idea what it's like to really be up against it. This is the opposite end of the story. The New York Times reported that the three major credit reporting agencies, Equifax, Experian and TransUnion, maintain so-called VIP lists of politicians, celebrities, judges, and other people deemed to be influential.

You might not even know you're on such a list, but here's the trick of it - is that it reports that one of the perks of being on these lists is that if there's an error on your credit report, somebody actually deals with it as opposed to the rest of the great unwashed, us.

HALL: Yes.

MARTIN: Who apparently, it's like you get shoved off into some file in the sky and, you know - and so what can you do about this? I mean, I think it's putting the shock to many people to feel that there is this sort of completely two-tiered system to dealing with errors.

HALL: Are you really shocked?

MARTIN: Well...

HALL: I wasn't. I really wasn't because we live in a culture today that really elevates celebrities and famous people. And they get extra treatment when they go through airports. They have special lines that they go through. They don't have to do the same things that you and I have to do. So I'm not at all surprised.

MARTIN: OK. So the issue is not that maybe they get red carpet treatment. The issue is what everybody else gets. And apparently, what everybody else gets is this completely shoddy system where you don't really get a person dealing with your situation. So what do you do if, in fact, there's an error? And as you've told us many times, these credit reporting scores, these credit scores can be absolutely crucial to getting...

HALL: Absolutely.

MARTIN: ...credit, getting a mortgage, things of that sort. So what do you do if you are not a VIP, and there are these errors? What are you supposed to do?

HALL: Make the initial phone calls that you have to make, and then follow up with a letter. Writing is still a really important way to get their attention, especially if you cc that letter to the Better Business Bureau or the state authority dealing with companies who are not following through. There are consumer laws that protect us against this. And the report, I think, also talked about the fact that people felt that the service they got from a lot of these companies was really shoddy.

They would just do perfunctory checks of your credit record and then do light reports. And if something was wrong, it would be kicked back very quickly because all they do is give it a score of one, two, or three, depending upon the problem. Go, in writing, as soon as possible. People forget that making a phone call today does not always get you the results that you want.

MARTIN: Well, the other issue here is there doesn't seem to be any incentive for them to fix these errors.

HALL: None. None. Because they work for the businesses that ask for the reports. They don't work for us, the consumers. The law is really skewered. This is why I'm hoping that when it goes over to the new federal agency dealing with credit, that they will put some stronger laws that say if the report and the information you have is incorrect, it should be done in a timely basis. And they should put a real limit on this because this hurts people - especially people who are poor, who have been unemployed, who have gone through a difficult time. The credit report can affect their future employment. This is completely unfair, and creates a completely two-tiered system in America.

MARTIN: Has this ever happened to you?

HALL: Yes. This has happened, and it makes me crazy. What makes me even more crazy, though, is that my grandmother, who never lived with me, who died 12 years ago, still gets solicitations to my apartment in New York City.

MARTIN: That's crazy.

HALL: Somehow - and on my credit report, her name appears. She has never lived with me. Not once.

MARTIN: That's terrible.

HALL: Isn't it?

MARTIN: Well, I know you'll deal with it.

HALL: Yes, in writing.

MARTIN: That's right. In writing. Now, TELL ME MORE's regular financial contributor Alvin Hall joined us from our NPR studios in New York. Alvin, thanks so much for joining us.

HALL: On with the war against this improper credit.

MARTIN: All right.

(SOUNDBITE OF LAUGHTER)

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