Are you struggling to pay your credit cards and your mortgage every month? Are you finding yourself having to choose which one is worse not to pay? You aren't alone. Many consumers are making tough choices about prioritizing bill payments. Interestingly, there is a shift towards more consumers making the choice to pay their credit cards over their mortgage. In this post, we take a look at what is leading to this phenomenon, what the long term implication is and ways to afford both.

Three years ago, if you had told your parents or friends that you were going to quit paying your mortgage and instead pay down your credit cards, everyone would have thought you were crazy. They would have said "ALWAYS pay your mortgage first!"

But, as we all know, the world has changed. So have financial perspectives. One very interesting trend is that more and more consumers are skipping their mortgage payments in favor of paying their credit-card bills.

As noted in a recent MarketWatch article, "To heck with the house, I need that credit card," consumers with tight budgets have had to make tough decisions because they could not afford to pay all of their expenses. For many people, having a credit card in good standing is a top priority, and that is reflected in a Yahoo! Finance article reporting that more Americans are paying credit card debt on time.

There are a number of reasons why consumers may skip mortgage payments. While one of the largest contributing factors is the rise in unemployment from the recession, a surprising new statistic is the number of underemployed consumers. As noted in a Gallup poll from March, 20 percent of the American workforce is underemployed - that is, consumers who are overqualified and underpaid for their positions or who are working part-time or temporary jobs. Most part-time positions do not pay benefits or pay consumers enough money to meet monthly budgets.

For those who are unemployed or underemployed, the harsh reality has set in that owning a house is a tremendous financial responsibility. In addition to the mortgage, there are taxes and costs for upkeep. No one wants to lose their home, but a more pressing need is to not lose a credit card that can purchase basic necessities, like groceries and fuel to get to work or look for a job.

How did we get here?

The recession we have been facing for the past two years was created in large part because consumers took on mortgages that were way above what they could really afford. Many homeowners took out adjustable rate mortgages (ARM) that had affordable payments at the start, but payments that sharply increase after a few years. And when the value of homes quit going up, many buyers found they are left with overvalued homes that they cannot sell or refinance.

The devaluation in the real estate market means that many homeowners are paying a mortgage on a house that is worth less than the purchase price. They have little to no chance of ever recouping the purchase price, much less gaining equity in the home.

That creates a significant problem for consumers, because in the past consumers were accustomed to using home equity lines of credit as backup for emergencies or times of need. That backup plan is no longer an option.   

Given all of these factors, many homeowners have started to consider a previously unthinkable approach - not paying the mortgage because there will never be a way out. Instead, they are willing to let their homes go into foreclosure, and then rent or purchase another home at current market rates to have more chance of equity in the future.

For example, in a recent "60 Minutes" report, half the homeowners in Arizona are underwater (their homes are worth less than their mortgages). One consumer in the story noted he initially thought it was immoral to walk away from his home because he believed in contract liabilities. He tried to renegotiate with the bank, but they wouldn't do anything because he could afford the payments. Eventually, like millions of other consumers, he stopped making payments and went into strategic default.

Consumers are even more likely to let go of vacation homes where there is no real need to hold onto the property since it is a second residence.

While homes have become a less stable source of equity, credit cards offer an ongoing financial resource for consumers. This is a source they don't want to see dry up because unfortunately, they rely on it to get by every month.

A TransUnion consultant recently said in a Reuters' story, "By making a minimum payment on a credit card before a full mortgage payment, it gives consumers monetary leeway to go about their daily activities, especially if they have lost a job."

A FICO Score Trends report found that mortgage-default risk for consumers with high scores now exceeds their credit-card-default risk, "reversing a long historic trend" as reported in Mortgage News Daily.

Long term impact

Some consumers simply don't understand the long-term ramifications of using credit cards to survive. In fact, the average household has more than $16,000 of credit card debt. If consumers are unable to pay more than their minimum payments, they could be stuck with debts that take 20-30 years to pay off with penalties such as increased interest rates and unnecessary fees. The issue is deeper than just mortgage vs. credit card payments. Once consumers turn to a lifestyle living on credit, it is a never ending battle. In the wake of a new credit-card law, as banks tighten credit, many consumers will see this path as a challenge to continue long term.

In addition, losing a home to foreclosure will have a huge impact on a person's credit score. At CareOne, customers indicate that having a credit hit is not as bad as being under a huge mortgage that they are unlikely to be able to sell or gain equity from. In reality, it really depends on the local market conditions for resale of the property and how much debt the consumer owes on the home.   

Alternative options

Another option for consumers is to get serious about their budgets if they feel like they can get ahead and back on target to pay the mortgage. This means being very frugal with monthly expenses and living a life without relying on credit cards. This can be a scary choice, but many members of the CareOne community have talked about how they have done it and how it gets easier once you make the conscious choice not to use credit cards.

This is most certainly a tough situation for many consumers. Unfortunately, there are no easy answers or solutions.

Are you in this situation? How are you handling it? Do you have tips for people in the same situation? Please share your thoughts in the comments section.