According to analysts at TransUnion, the recent trend of consumers prioritizing their credit card bills over their mortgage payments is likely to continue for the foreseeable future. In this blog post I would like to examine this trend by comparing it to Maslow’s hierarchy of needs.
Up until 2008, consumers tended to focus on their payments for large installment loans first (house, car, etc.) and their revolving debts (credit card) second. Given the choice between defaulting on their mortgages and defaulting on their credit cards, consumers almost always chose to default on their credit cards. This fit with the conventional logic that mortgage payments should be prioritized first because a house was the most valuable asset that most consumers owned.
Then, the housing market collapsed. This was followed by one of the worst recessions in U.S history and the beginning of an interesting new trend. Consumers started prioritizing their credit card payments over their mortgage and auto loan payments. The question is why? What were the psychological drivers that precipitated this unprecedented shift in consumer behavior?
To answer this question we need to compare this reorganization of the financial products hierarchy to another well known hierarchy—Maslow’s Hierarchy of Needs. Quick refresh—In the 1940s, Abraham Maslow proposed that there is a fundamental hierarchy of needs that motivate human behavior. The most basic physiological needs (food, water, sleep, etc.) are always the first needs that people are motivated to satisfy. Once we have food and water and oxygen, we start to focus on satisfying higher level needs. Maslow’s Hierarchy continues as follows: safety needs (employment, property, resources, etc.), love/belonging needs (friendship, family, etc.), esteem needs (achievement, respect, confidence, etc.), and finally the need for self-actualization (the need to realize our full potential). Maslow’s theory, which has become a foundational component of motivational psychology, helps explain things like the myth of the starving artist (hungry people don’t care about creating art, they care about feeding themselves).
When times are good, owning a new house is not just about satisfying our basic need for shelter. It’s also about satisfying our higher level need for achievement and respect from others. In times of economic uncertainty, when basic necessities (like having a job and an income) are threatened, people tend to focus on securing those fundamental needs above their higher-level needs like achievement. I would argue that the financial products reprioritization (1.credit card 2.auto loan 3.mortgage) that we are seeing fits perfectly with this theory. A car is a higher priority than a house because in the words of one banker I spoke with “you can sleep in your car, but you can’t drive your house to work”. A credit card is more valuable than a car or a house because it can be used for transportation (e.g. buying a subway pass), shelter (e.g. rent for an apartment), and other basic necessities.
Understanding the underlying needs that motivate consumers’ financial choices is critical. Banks need to focus on creating greater customer loyalty by demonstrating to their customers that they understand their needs and empathize with their situations. Small steps in this direction can have big impacts.
- Waiving late fees for historically good customers who are currently struggling.
- Approving a consumer for a low limit credit card despite the fact that they are behind on their mortgage.
- Offering free debt consolidation services to customers that are starting to fall behind on their obligations.
Abraham Maslow once wrote “for our chronically and extremely hungry man, Utopia can be defined as a place where there is plenty of food.” In today’s economy, in which many consumers are struggling to satisfy their most basic needs, banks that provide the products and services to help satisfy those needs will position themselves as part of their customers’ Utopias.