America’s looming credit card debt crisis

Credit card data is painting a deceptively optimistic picture

Aggregate credit card debt data is masking the reality of lower income Americans. While overall card debt declined during this crisis, an already bad situation got worse for those hit hardest by the Great Lockdown.

The 50 states are starting to reopen, the stock market erased its losses for the year, employment is slowly bouncing back and we’re acquainting ourselves with the ‘new normal’. It’s a good time to consider the lasting impacts this crisis will have on American families’ financial health.

Prior to the COVID-19 crisis, credit card debt had hit its highest level ever at around $860 billion, according to the Federal Reserve. Almost six out of 10 cardholders, or around 110 million U.S. adults, entered the coronavirus pandemic with outstanding credit card debt, according to a recent study from CreditCards.com. And of those with credit card debt, more than half have been carrying it for more than a year.

That’s bound to take a toll not just on people’s financial health, but also on mental health, as financial concerns are the main source of stress in the US, according to BlackRock’s annual Global Investor Pulse survey.

Enter the pandemic

The coronavirus pandemic has inflicted an enormous human toll and taken over 100,000 lives in the US alone. As the economy ground to a halt, 1 in 8 Americans were unemployed, the highest level since the Great Depression.

Strict lockdown measures and tremendous uncertainty resulted in record shocks to private consumption. Americans couldn’t and wouldn’t spend, causing credit card purchases to plummet by 40%.

Government spending and aid programs helped boost aggregate income and partially dampened the fall in consumption. Meanwhile, the personal savings rate shot up from 8 to 33%, the highest it’s ever been.

Consumption plummeted at the height of the pandemic (Source: Fred)
Personal income and savings increased to record levels (Source: FRED)

Why the huge jump? The decline in spending means many savers are using their income to pay off the credit card debt that’s been hanging over their heads. More than one fourth of millennials who received a stimulus check spent it, or are planning to spend it, on paying off their card debt, according to a Covid-19 & Finances Survey conducted online by The Harris Poll on behalf of TD Ameritrade in April.

In consequence, outstanding credit card debt and other revolving debt declined to the lowest since late 2017.

Outstanding revolving debt decreased $100 billion (Source: FRED)

Not the Full Picture

But that’s not the full picture. Half of Americans say their finances are getting worse amid COVID-19. Almost 20% of Americans, or 58 million, are most worried about paying their mortgage or rent during the coronavirus pandemic, followed by nearly as many who are most worried about paying their credit card bill.

“Sickness isn’t the only symptom of the novel coronavirus,” according to a CreditCards.com poll. The new survey reveals nearly half of U.S. adults currently have credit card debt, up four points from 43% in a similar survey conducted in early March. Three in 10 cardholders are using credit cards “more than ever” since the beginning of the coronavirus pandemic, according to CompareCards.

So how can that be when overall credit card debt is declining?

Minorities Most Hurt

The additional debt burden is disproportionately affecting certain groups. Hispanic and black Americans, who also earn less on average, have been hit hardest. More than 60% of hispanics and more than 40% of African Americans said someone in their household lost their job or took a paycut since the crisis started. About 70% of those polled for both groups said they don’t have a rainy day fund.

And while some millennials have used their extra cash to pay off debt, 34% said they went more deeply into debt because of the pandemic, according to Pew Research. Across the US, 23% of consumers with credit card debt added to it during the pandemic, according to a CreditCards.com poll.

Hispanics and black Americans hit hardest by the Great Lockdown (Source: Pew Research)

Lasting Impact

Financial conditions are bound to get harder. Banks have tightened standards to approve consumer loans. One in 4 cardholders saw their limit slashed and/or their card closed at the height of the pandemic, according to CompareCards.

40% of banks have tightened standards on consumer loans & credit cards (Source: FRED)

For consumers, growing debt and reduced access to credit can spell disaster . On a recent Forbes article, Shahar Ziv exemplifies how hurricane Katrina unleashed a downward spiral:

“Americans let credit balances grow and could only afford to make minimum payments; high interest rates caused the amount owed to increase rapidly, which reduced the amount of available credit; credit scores started to drop, reducing credit lines and access to affordable borrowing; delinquencies and bankruptcies began to rise” causing a strain on the national economy”.

And while the broader stock market has recovered, mass-market credit card issuers’ stocks are still down more than 25% this year, which means investors are betting on sluggish spending, decreased originations and increased delinquencies.

Credit card issuers lagging in stock market recovery (Source: Google Finance)

In a downturn scenario, losses from revolving debt could balloon to more than $130 billion over the next two years, according to a McKinsey report. Card companies and banks have already increased their credit provision by 100–400% from a year ago.

To help break this cycle, there has been discussion on further fiscal policy beyond the CARES act. One interesting proposal is the Credit Card Interest Relief During the Pandemic Act (CIRPA), that would cap interest rates on credit cards and subsidize up to 70% of interest charges on consumer credit cards. Talking to lenders and considering credit counseling might be advisable for those in deeper waters.

Regaining control

Bur rather than wait for government plans, consumers should take action as soon as wages start hitting their wallets. The longer they go without paying down debt, the higher the tower of fees and interest will become.

The goal at Smash, the fintech app I’m helping build, is to give you the tools to make this easier. We help people program their money to outsmart credit cards. Getting started is free and for everyone.

In this article we outline 10 recommendations to follow as you work towards improving your financial health, including making a budget and crafting a payment plan. Check it out. The only thing you have to lose is your debt.

Building @GetSmashApp (www.smash.money) to help people outsmart their credit cards. Previously at @BCG

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