Consumer Credit: What Does it All Mean?

The year 2020 will go down in the history books for many things. It has been a year of massive societal and financial upheaval not only in the U.S. but also around the globe. Early in the year, the U.S. was experiencing a wave of wealth and prosperity as stock markets soared and unemployment was at near-record lows. Then came the pandemic and “15 days to flatten the curve” turned into six months and counting for most of the country.

Perhaps one of the most surprising things about 2020 is the impact it has had on consumer debt. More specifically, on revolving debt, of which credit cards carry the brunt of the burden. From lows of 3.5 percent in February of 2020, the jobless rates across the country shot up to 14.7 percent in April of 2020. As of August 2020, those rates had dropped to 8.4 percent unemployed, allowing many consumers to breathe a sigh of relief.

What Does This Have to Do with Consumer Credit?

Many people were surprised to see correlating changes in consumer spending and debt repayments. For instance, in May of 2020, CNBC reported that household debt increased by $14.3 trillion (with a “T”) during the first quarter of the year. The first two of these three months were before a time when most Americans had even heard rumors of the lethal virus making its way to our shores.

They were long before layoffs, shutdowns, and small businesses closing doors forever began to occur. Some might even say it feels like a lifetime ago when Americans freely gathered for meals at their favorite restaurants, attended concerts in giant arenas, purchased tickets for sporting events, museum tours, gallery openings, and so much more. All of these things were items we spent freely on and thought little about charging to our credit cards to pay for at a later date.

Then, COVID-19 became a household word, along with a few others, like “social distancing” and “flattening the curve.” A scary new reality faced the nation as many people who had not been identified as essential workers faced, at least temporary, if not long-term, and perhaps even permanent unemployment, and many common expenses and recreations came to a grinding halt.

In the early days of the pandemic, some families turned to credit cards to help with temporary expenses. This is according to another CNBC report stated 23 percent of credit card debtors added to their debts in response to COVID-19.

Here’s the good news, though, while spending for things like housing was on the rise as people were purchasing homes in the early part of the year, student loans and auto loans remained fairly static. However, the biggest shock to some was that credit card balances actually declined, down by $34 billion by May of 2020. Some of this is easily explained as a large portion of non-essential spending was considerably down as all non-essential businesses shut down for many months (some remain closed even now as various states combat COVID-19 and work to manage its spread).

The thing to remember is that these declines in consumer debt occurred even while some people were increasing credit card spending in response to COVID-related income shortfalls. If the trend continues, with consumers charging fewer expenses to credit cards while paying down balances, some may find lasting relief from revolving credit debt by the time COVID-19 becomes a distant memory.

For those who are relying more heavily on credit cards to weather the storm of the pandemic, the future may be grim as delinquencies and defaults may lead to an increase in bankruptcies along the way.

Minding Your Credit Now and During Recovery

For many people, it is easy, at least for the moment, to avoid spending on credit cards. With many stores imposing limits and restrictions, other stores remaining closed, and almost all entertainment venues (including restaurants in some states) down for the foreseeable future, consumers aren’t shopping for occasions, planning lavish parties, having weddings, going to concerts, and selling all the items that support things like nights on the town, date nights, large family meals, or lavish gifts for weddings and other events.

Recovery will happen. Eventually. When that does, it is important for consumers to avoid the temptation to rush out and begin spending right away. Not only could second waves occur that force further shutdowns, but the long-term financial effects could be devastating.

As a nation, we’re still trying to sort out what the financial, emotional, social, educational, and business repercussions of COVID-19 will be. We have no idea how long it will be before life returns to normal – or even if it will ever return to the way things were before. It took about three years after the great recession for consumer spending and credit card debt to return to pre-recession levels. For most consumers, that was good news.

We have no idea what life will look like once the threat of COVID-19 is eradicated once and for all. While many Americans are looking forward to the idea of being able to appear in public without wearing a face mask or bathing in hand sanitizer, others are looking for a return of the things they enjoyed before COVID.

Simple things, such as listening to live bands play in their favorite bars, museum outings, banging on the “glass” at a hockey game, or even spending sunny summer days at the beach are often worth every penny. Just don’t go overboard on your credit card spending once these great things return. Doing this can help you keep your credit report in better shape so that you don’t have to worry as much about the long-term effects of the small credit spending decisions you make today.