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Credit Card Debt in the US

Credit Card Debt in the US

Credit Card Debt in the US The economic recession following the COVID-19 pandemic shifted the way Americans approach money. The changing approach to spending is evident in the difference between the pre- and post-pandemic trends in credit card usage. There has been a significant decrease in credit card loans, debt, and the delinquency rate since the beginning of the recession in March 2020.

These trends can be attributed to decreased interest rates on credit card loans and the government policies providing financial relief to Americans.

With the resources being as tight as ever, the consumption decreased significantly over the pandemic. There was a large drop in personal consumption in the beginning of 2020. Personal consumption expenditures excluding food and energy decreased by over 138% from the year ago, as shown on Figure 1, insinuating that Americans cut down on entertainment, travel, etc.

The total consumption expenditures, however, went back to normal later in 2020.

Figure 1

The drop in consumption in April 2020 (Figure 1) is reflected in the sudden drop in consumer credit card loans in the same month (Figure 2). Credit card loans taken went down from over $858 billion on March 11, 2020 to $763 billion in the beginning of June 2020.

There has not been a significant increase in consumer credit card loans since then. The loans totalled $745 billion on May 19, 2021 – still drastically low compared to the pre-pandemic value of $858 billion. According to Equifax Inc., a credit-reporting firm, the total credit card balance was $749 billion in March 2021, reflecting a 2% decrease from February 2021 and a 14.5% decrease from February 2020. Even though the consumption rate is mostly back to normal now, the credit card borrowing rate has yet to go back to where it was before the pandemic.

Figure 2

While the USD value of credit card loans has decreased since March 2020, the proportion of credit card balances paid off in Q1-21 in the US was a record high since 2000, according to Discover Financial Services. Synchrony Financial reported a higher credit card debt payment in Q1-21 than before the pandemic. As evident on Figure 3, the current total outstanding credit card debt is the lowest since the beginning of 2020. This observation is interesting, since one would expect credit card debt to go up during the pandemic as the job loss and lower income would make it harder for Americans to pay off their debt. But, Figure 3 shows the opposite trend. In fact, the decrease in credit card debt can be correlated with the decrease in total credit card borrowings (Figure 2) – fewer borrowings, less overall debt. So, the decreasing trend in the US credit card debt highlights the relatively high ability of Americans to pay off their debt during the pandemic.

Figure 3

(Source: Wall Street Journal)

A similar counter-intuitive trend is evident in the delinquency rate on credit card loans. One would expect that with the strains of the COVID-19 pandemic on the American economy, Americans would be less likely to pay off their credit card loans on time, increasing the delinquency rate. In fact, as shown on Figure 5, the delinquency rate has decreased significantly since the beginning of the economic recession in 2020. The overall decrease in the delinquency rate on credit card loans from the pre-pandemic period can be due to multiple factors.

Figure 5

First, as evident on Figure 5, the interest rate on credit card plans has decreased from 15.09% in Q1-20 to 14.52 in Q2-20, coinciding with a significant decrease in the delinquency rate – from 2.70 to 2.41. Even though the interest rate and, subsequently, delinquency rate, have increased from Q2-20 to Q4-20, the overall delinquency rate still remains significantly lower than the rate before March 2020. Hence, the decrease in the commercial bank interest rate on credit card loans might be a contributing factor to the decreased delinquency rate on credit card loans.

Furthermore, the pause on federal student loan payments has provided significant relief to Americans. Since March 27, 2020 – when the policy was enacted – 42 million Americans with student loans have saved a total accrued interest of approximately $4.8 billion per month. It is possible that Americans decided to switch to paying off their credit card debt as student loan interest rates came down to 0%. So, the pause on student loans could be a contributing factor to the decreased delinquency rate.

After a drastic drop in May 2020, mailed credit card solicitations ramped up from July 2020, reaching $260 million in March 2021. The number of new credit card accounts created in March 2021 is still relatively small compared to the value in March 2020. However, there seems to be an overall increasing trend in credit-card solicitations, as shown on Figure 4. There has been a relative increase in credit card loans starting April 2021 to now (Figure 2) which might be coinciding with the increased credit card solicitations in March 2021.

Figure 4

(Source: Wall Street Journal)

The US is not yet close to the pre-pandemic dollar amount of credit card loans. However, as the COVID-19 vaccination rate goes up and cities and states start opening up, the credit card borrowing rate is also supposed to increase. The positive trend of credit card solicitations can be an indicator of the transition to the pre-pandemic era.

Written by Lika Mikhelashvili

JPMorgan Head of Machine Learning Peng Cheng | JPMorgan | Rebellion Research
Bank of Montreal’s Head of AI | Rebellion Research


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