American Debt: Sharp Decline for Credit Card Balances in Q2 2020

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American Debt: Sharp Decline for Credit Card Balances in Q2 2020

Low interest rates are often beneficial to customers. When borrowing rates are low, more money is returned to people’s wallets. People often have more discretionary money, enabling them to make greater purchases and purchase items they would not ordinarily buy, such as a new automobile or furnishings. Even a wonderful trip becomes much more inexpensive. And, if their credit scores are high enough, they’re typically ready to incur the risk of adding additional debt to their list of responsibilities.

While low interest rates are frequently a boon to most people, there may be a catch. More debt may increase a person’s burden—if things do not go well, a customer will be unable to repay their commitments. This includes loans, auto leases, mortgages, and credit card debt, which is one of the most frequent kinds of consumer debt. But what is the current scenario like for Americans with their credit card debt? Continue reading to discover out.

Key Takeaways

  • Credit card debt is a kind of unsecured, revolving credit that cardholders may use on a regular basis as long as they make payments.
  • As of the second quarter of 2020, household credit card debt was still decreasing.
  • Credit card delinquencies fell throughout the same time period.

Credit Card Debt: The Basics

Credit card debt is a common unsecured kind of debt held by the overwhelming majority of customers. It entails qualifying for and applying for a revolving credit line from a lender, which is often a bank or other financial institution. Lenders provide credit cards with varying credit limits depending on a consumer’s credit rating, credit history, financial status, and connection with the client. Balances and payment history are reported on a regular basis to the three major reporting agencies.

Customers have the option of paying down their amounts in full each month. Those who do not must carry the unpaid sum from month to month. This implies that they pay interest on the amount they owe. The rate charged by the lender is known as the annual percentage rate (APR), and it is determined by their credit history. Cardholders may also reuse their credit after making payments on their cards since they have a revolving limit.

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Paying down your credit card bills in full each month might save you a lot of money. If you don’t, you’ll end up paying extra since interest is applied to any outstanding debt every month.

Snapshot of American Credit Card Debt

The Federal Reserve Bank of New York publishes monthly updates on household debt in the United States. These reports are created every quarter and are based on information gathered from Equifax, one of the country’s three main credit reporting agencies. This information is derived from Equifax’s random nationwide sample.

According to a survey issued in August 2020, household debt fell by $34 billion in the second quarter of 2020. Total household debt, including mortgages, home equity lines of credit (HELOCs), vehicle loans, and credit cards, rose to $14.27 trillion. 1

Credit card debt fell $76 billion from the first quarter to $820 billion. 2 This was the steepest documented decline in this category of debt since data collection began. 1 Credit card debt has also decreased by $51 billion year on year as of the second quarter of 2020. During the same time period, the number of new cards issued to customers decreased. Credit card credit limits declined by $53 billion, the first decrease since the fourth quarter of 2012. 1 The survey also noted a decrease in delinquency rates during the second quarter of 2020 compared to the first—5.05% vs. 5.31%. 2

The worldwide COVID-19 epidemic has mainly influenced developments in American credit card debt, from balances to new issuances and delinquencies. 1 People reduced their spending throughout the quarter due to lockdowns, company shutdowns, and social distancing policies. The Coronavirus Aid, Relief, and Economic Security Act was a major contributor to the decrease in late payments and delinquencies (CARES).2 It supported a number of programs to assist consumers and companies, including small business loans and grants, as well as an increase of unemployment benefits for people who were furloughed from their jobs. On some loan packages, several lenders also permitted payment deferrals.

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What Does Falling Credit Card Debt Mean?

TransUnion, another of the big three credit reporting companies, confirmed these results. The survey, which was released in July 2020, also stated that customers’ financial difficulties are decreasing, with credit card balances falling for the fourth consecutive month in July. 3 Despite the fact that borrowers are not feeling the pain, the personal credit market performed well. This suggests that delinquencies are and will continue to be low. 3

But all of this might be for nothing. In reality, the agency anticipates delinquencies to grow as a result of other economic concerns. Furthermore, the stimulus packages and government action that are assisting consumers and companies may only be a temporary cure. 3

Credit card debt may also become an issue if a recession occurs or if interest rates grow faster than family income. Customers who typically pay their accounts in full may begin to make lower payments. Households who regularly make minimum payments or somewhat more may cease paying entirely, resulting in an increase in delinquency rates. Seriously late accounts are significant since lenders may never collect a dime on them. Then, when lenders lose money, customers face reduced credit limits and stricter credit card application requirements. If you used credit during the Great Recession, you are all too familiar with how this process works.

Other Household Debt

What about other kinds of debt? As previously stated, the overall amount of household debt decreased throughout the quarter. According to our analysis, as of June 30, 2020:

  • Balances on HELOCs fell $11 billion to $380 billion. 2
  • Automobile debt fell by $3 billion in the first quarter of the year 2 to $1.34 trillion.
  • More auto loans and leases were issued throughout the quarter, totaling $136 billion in new contracts1.
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Mortgage debt, the most common kind of consumer household debt, did rise. According to the research, consumer files revealed a total of $9.78 trillion in mortgage loans, a $63 billion rise from Q1 to 2020. 2 1 The total amount of new mortgages granted during the quarter was $846 billion. This is the highest volume witnessed in the market since the refinancing boom in 2013. 1

Student loans increased to $1.54 trillion in the second quarter of the year. This is a $2 billion gain over the prior quarter. Delinquencies in this category fell from 8.87% to 6.48% in Q1. Again, this is mostly owing to federal and state government stimulus efforts during the worldwide COVID-19 epidemic.

The Bottom Line

Although a low-interest rate environment may tempt customers to take on additional debt, many consumers are actually limiting their expenditure. Credit card balances and delinquencies are decreasing as a result of government assistance and the global pandemic. However, both the stimulus and the virus may be short-term, things might alter very fast, requiring consumers to prepare themselves.

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