Consumers Paying Credit Card Debt Instead of Mortgage

Changes to the US bankruptcy code, enacted in 2005, are coming back to haunt banks, according to Yra Harris, a veteran trader at Praxis Trading.

Harris told CNBC that banks lobbied hard for changes to the bankruptcy code, but the legislation is now having the effect of encouraging consumers to do all they can to pay down their credit cards, while leaving their mortgage payments on the backburner.

“People have learned that hey, (a mortgage payment is) a nonrecourse loan and not only that, I can stay in my house or my condominium for 12 to 18 months before they really get me out,” explained Harris.

“We’re seeing a huge amount of people paying down their credit cards, because they want to have those credit cards as rainy day money just in case they need them," he added.

The amount consumers owed on their credit cards dropped to its lowest level in eight years, according to credit-reporting agency TransUnion.

TransUnion also said credit card delinquencies in the second quarter fell by 21.3 percent year over year, while mortgage delinquencies rose 14.8 percent from the same period last year.

Both credit card and mortgage delinquencies, however, are down compared to the first quarter of 2010.