(Newswire.net — September 7, 2020) — An interesting financial development has arisen out of the COVID-19 lockdowns. A number of signs indicate credit card debt is dropping during the pandemic. According to the New York Federal Reserve Bank, credit card balances fell by $76 billion in the second quarter of 2020, coinciding perfectly with the quarantines. Moreover, the New York Fed reports this figure represents the steepest decline in credit card balances in recorded history.
So, what’s going on?
Nowhere to Go But Online
Consumer spending habits have evolved in response to the new paradigm and the result is far less spending. People were forced to stay home, so credit card spending decreased in general.
This makes perfect sense when you think about it. Professional sporting events, restaurants, department stores, jewelry stores and other places where discretionary spending takes place were not available. Moreover, with so many people out of work and/or unsure about their financial futures, spending decreased in general.
Less spending means fewer credit card charges, means credit card debt drops.
Record Unemployment
The nation’s unemployment rate peaked at 14.7 percent in April, which was a new record high for the United States. By June, the jobless count had dropped by 3.6 percent to 11.1, but that’s still much higher than usual.
In fact, it’s even higher than the numbers the country experienced during the Great Recession following the real estate crash of the previous decade. As a result, Oxford Economics reports consumer credit balances declined during each of the three months from March to May of 2020.
In other words, even if people had somewhere to go, the uncertainty surrounding personal finances led people to dial back frivolities and focus on necessities. Interestingly, this is the exact strategy put forth by many credit card debt relief experts.
In this case, though, people had it forced upon them.
Good News for Consumers — Bad News for the Economy
The New Fed also observes non-housing credit balances fell by $86 billion, which represents the largest decline it has seen since it started keeping track. On the other hand, delinquencies fell too, however it’s thought much of this is owed to people taking advantage of forbearance deals and other relief measures offered by the government and creditors to help consumers maintain their solvency.
Accounts in forbearance are reported to credit bureaus as being current.
“Protections afforded to American consumers through the CARES Act have prevented large-scale delinquency from appearing on credit reports and damaging future credit access,” said Joelle Scally, Administrator of the Center for Microeconomics Data at the New York Fed. “However, these temporary relief measures may also mask the very real financial challenges that Americans may be experiencing as a result of the COVID-19 pandemic and the subsequent economic slowdown.”
In other words things are looking OK for now, but the real story may have yet to emerge.
Large Wave of Bankruptcies Expected
The number of personal bankruptcies also fell during the months of April and May. The American Bankruptcy Institute reports April filings were down by 47 percent and May’s were down by 43. The six-month count for the first half of 2020 was 24 percent lower than that of the first half of 2019.
Experts speculate much of this is owing to the fact that attorney’s offices and courts were closed. What’s more, people have had so many other things on their minds; bankruptcy filings were forced to take a back seat. However, as consumers get acclimated to the “new normal”, government assistance programs peter out and the new paradigm fully emerges, that’s expected to change.
High unemployment figures and an elevated rate of bankruptcy filings tend to go hand-in-hand. However, timing of the filings lags that of the occurrence of unemployment. So, while credit card debt is indeed dropping during the pandemic, a sharp increase in bankruptcies is expected this fall.