Credit card debt in the United States has plummeted since the COVID-19 crisis started, according to the most recent data from the Federal Reserve. The decline may seem counterintuitive given the pandemic’s effect on the economy.
According to the Fed’s latest Consumer Credit report, the amount of revolving consumer debt, which is primarily made up of credit cards, fell below $1 trillion in May 2020 for the first time since May 2011 during the Great Recession. Notably, it also marks the third straight month of decline.
With the domestic unemployment rate stuck in the double-digits and the gross domestic product (GDP), one of the most widely accepted indicators of the nation’s overall economic health, down approximately 5% in the first quarter of 2020 with further declines likely to be reported in Q2, you might expect that people would be relying on their credit cards more than ever.
However, experts say the debt drop is exactly what they expected. Here’s why:
We Are Choosing to Spend Less
“If you look at the Great Recession, this is what happened then,” says Brian Riley, director of credit advisory services at Mercator Advisory Group, a payments research and consulting firm, who says a change in spending patterns is only one of the drivers behind the falling numbers. “Consumers know they have issues and they are unemployed, there’s a lot of self-governance and general spending is down.”
According to estimates released June 26 by the Bureau of Economic Analysis (BEA), personal income decreased $874.2 billion (4.2%) in May and disposable personal income decreased $911.1 billion (4.9%). In other words, when you have less to spend, you spend less.
At the same time, the BEA found that the U.S. personal savings rate was nearly twice as much in May (23.2%) as it was in March (12.6%), suggesting that many consumers are taking a cautious approach to using their money.
“Given the relatively long runway we had regarding COVID-19—meaning we all were told for weeks that we may have to shut things down and people may lose their jobs or have their hours reduced—a smart reduction in non-essential credit card spending also probably contributed to the reduction in balances,” says John Ulzheimer, a nationally recognized credit expert and former FICO and Equifax employee.
We Have Fewer Ways to Spend
Beyond proactive budgeting, consumers also simply have fewer options to spend their available income right now, likely contributing to the decline. According to a U.S. Census Bureau’s Advance Estimates of U.S. Retail and Food Services report, total sales for the period from March 2020 through May 2020, the most recent data available, were down 10.5% from the same period a year ago.
“Before the pandemic, the federal government estimated each American household spent more than $3,000 a year on dining out. With this pandemic-fueled economic uncertainty, it’s a sure bet we’re all spending less on anything that’s not absolutely necessary,” says Howard Dvorkin, CPA and chairman of Debt.com, a credit repair and debt management site.
More than 54% of Americans say they are cooking at home more since the COVID-19 crisis, with 58% of those saying that saving money was the main motivation, according to an April 2020 survey by Hunter, a food and beverage marketing communications firm.
The drop is not only fueled by dining at home. Travel has taken a freefall with domestic travel spending forecast to drop 40% from $972 billion in 2019 to $583 billion in 2020, according to a U.S. Travel Association report.
Many venues, from malls to theaters to bowling alleys have put their businesses on pause in recent months or shut down entirely, reducing the number of ways to pass the time outside of the house.
For example, a June 2020 Economic Impact Report by restaurant peer review site Yelp found that 53% of restaurants that had closed since March 1 have since indicated permanent closures on their Yelp pages.
Credit Card Companies Are Closing Accounts and Tightening Standards
If you’re unemployed and having trouble paying your bills, that also extends to your credit card debt. Issuers are getting hit with a double-dose of revenue-reducing circumstances, with some banks extending relief to customers such as pausing payments, reducing or forgiving late fees and eliminating interest charges. In some cases, entire chunks of a credit card’s balance might be forgiven.
Although these goodwill gestures in the face of the pandemic ultimately can cut down on profits, they’re generally intended to stave off the biggest loss of all, which is when a customer defaults entirely on their credit card balance. When this happens, it’s considered a charge-off, meaning a bank has given up on trying to collect on the debt. If your account is closed, it no longer counts as outstanding revolving debt.
“Credit card issuers are surely charging off more during this pandemic than they did beforehand,” says Dvorkin. “There’s no way it’s the only explanation for a $100 billion drop in debt.
Although the staggering drop in revolving consumer debt is significant, it’s likely due to a combination of pandemic-related factors: A significant change in consumer spending habits where people are earning less, spending less and saving more. Credit card companies are reducing their exposure by both writing off debts and tightening their lending standards.