In the years leading up to a home purchase, homebuyers become more conservative spenders and use their credit cards less frequently. After the purchase is complete, their spending habits take a turn.

Having cashed-in their down payment savings, new homeowners often turn to credit cards to finance common homebuyer purchases like appliances, furnishings and decor. But once these purchases are made and homeowners can resume saving, does high credit card use continue?

To find out, researchers at the Federal Reserve Bank of Boston examined credit card activity of homeowners leading up to and following their home purchases.

The researchers found that mortgage debt goes hand-in-hand with credit card debt. As compared to renters and homeowners without a mortgage, mortgaged homeowners have:

  • more frequent credit card usage; and
  • higher credit card balances.

The average household has greater liquidity in their credit cards than in their savings accounts. So it goes that — after cash on-hand — credit cards are the most-used source to cover financial shocks.

At the end of 2018, personal savings rates were at their lowest level since 2009, with households saving 6% of their income on average. Meanwhile, household debt has reached an all-time high as of the second quarter (Q2) of 2019, according to the Federal Reserve Bank of New York. Specifically, credit card debt is level with its last peak at the start of the 2008 recession.

The timing of today’s peak credit card debt is no coincidence. Consumers tend to take on the most debt — and save less — when their confidence in jobs and the economy is high. As the economy has continued to expand over the past decade, homeowners have taken on more debt with the expectation that their financial circumstances will continue to be stable.

However, as was learned during the Millennium Boom, expansions do not last indefinitely. In 2019, several factors are pointing toward the next recession, including:

Real estate professionals: you have no say in how much debt your clients take on once the purchase is closed. But you can counsel your homebuyer clients not to take on any credit card debt or make major purchases in the lead-up to closing. Between the time their mortgage application is approved and when closing occurs, lenders need to see a consistent debt-to-income ratio and balance sheet.

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