Consumers, inundated with stimulus money, shun credit card debt


When unemployment soared this spring at the start of the coronavirus, credit card debt and arrears they were widely expected to rise while struggling households borrowed more to make ends meet.

Instead, amid the deepest economic crisis since the Great Depression, the opposite has happened. Credit card debt in the US and other advanced economies has fallen. Fewer people are late with their credit card payments. Consumer demand for new loans – through credit cards, personal loans, and even pawnshops – has fallen sharply.

The main reason, according to economists and financial executives, is government stimulus programs launched in the US and other advanced economies that have worked unexpectedly well. The flow of money, along with debt relief measures such as deferred mortgage payments and student loans, have stabilized many households’ finances, leaving some in better shape than they were before the pandemic – at least for now.

“We don’t see consumers increasing the balance on their credit card; in fact, they continue to pay off balances, ”said Peter Maynard, senior vice president at Equifax, the credit reporting company that tracks consumer borrowing in the US, Canada, the UK and other countries. “They’re using the injection of government incentives, frankly, to put themselves in a better position.”

The phenomenon is emerging as governments debate whether and how to expand stimulus programs. US lawmakers and the Trump administration are negotiating new stimulus laws, such as the The $ 600 a week federal unemployment benefit expired Friday.

Canada and the UK are expanding and refining their incentive programs. The leaders of the European Union, who have agreed on a spending package of € 1.8 trillion ($ 2.06 trillion), now have to decide how they intend to use that money in their economies in the coming months and years.

Almost 18 million Americans are unemployed; that number could rise in the coming months as states are due to increasing coronavirus infections. Without an expansion in US unemployment benefits and other stimulus measures, indicators of financial distress, such as credit card debt, could quickly flash red, economists and financial executives say.

“Given the magnitude of the economic crisis, the number of cardholders has held up remarkably well,” said Roger Hochschild, CEO of Discover Financial Services. “Government aid will undoubtedly help people meet their obligations … If it is not renewed, it will shut down the entire economy.”

Total outstanding credit card debt in the US fell 11% or $ 100 billion between February and the end of June, according to Equifax. According to Federal Reserve data, April was the largest monthly decline in revolving credit ever, while May was the second largest. According to Equifax, the number of personal loan issues decreased by a third in mid-May compared to early March.

Since February, credit card debt has fallen 11% in Canada, 14% in the UK and 17% in Australia. In the eurozone, credit card debt and other forms of revolving credit to households fell by 5% between February and June.

Just four months ago, major credit card issuers expected Americans’ debt levels to be a problem and predicted soaring missed payments by the second half of the year. Millions of cardholders had signed up for deferment programs because they were unable to make their monthly minimum payments.

Lenders expected people to borrow more when the lockdowns started, but the opposite happened.


Salvador Sas / EFE / Zuma Press

But so far, there haven’t been major cracks in consumer credit performance. Major credit card issuers such as

Capital One Financial Corp.

and Synchrony Financial said many of their clients who embarked on procrastination programs in the spring left in June.

During the 2008 financial crisis and other recessions delinquencies increased as the unemployment rate rose. According to Equifax, the number of late payment credit card accounts in the US has fallen by more than a third. Most lenders don’t include accounts that have been deferred in their delinquency rates.

Part of the decrease in credit card debt is due to people spending less on their card due to restrictions imposed during lockdowns. Lenders have also tightened their underwriting standards.

But credit card debt has continued to decline, even as lockdowns eased in May and June and retail spending rebounded. Data from card companies indicates that the pandemic has led to a shift from credit card purchases to debit card purchases across all spending categories, in part due to government stimulus payments, analysts say.

“Incentive money goes to the bank account, and debit is the entry point to spending,” said Tony Hayes, who heads the payments industry division at consulting firm Oliver Wyman.

Do the incentive checks sent to individuals to help with the coronavirus crisis count as a form of universal basic income? Andrew Yang thinks so. But, as WSJ’s Jason Bellini reports, others believe the intent behind the UBI is wrong. Photo: Tom Brenner / Getty Images.

Incentive from the US government has provided an immediate economic boost of more than 9% of the gross domestic product, according to economists at the Brussels economic think tank Bruegel. That is also the case for $ 1,200 checks sent to eligible adults, the additional $ 600 in weekly unemployment benefits, and $ 500 for dependent children.

The combination of state and federal unemployment benefits has meant that about two-thirds of U.S. workers who were laid off or on leave are eligible for more unemployment than they earned at work, according to a study by economists at the University of Chicago. US stimulus laws also allowed people to defer payments on their federally secured mortgages for up to a year and most federal student loans through September. Those measures have given many Americans who lived with large credit card balances for years extra money to pay them off.

Alexis Smith, a residential environment administrator at a university in upstate New York, was released from her job in March when the university sent students home. Mrs. Smith, age 24, received $ 900 a week in unemployment benefits, or nearly double her normal salary. She reported back to work last week.

As Congress debates the next coronavirus relief package, millions of Americans are waiting to see whether the additional $ 600 per week unemployment benefits will be extended or reduced. WSJ’s Shelby Holliday Reports. Photo: Bryan Woolston / Reuters

The extra money gave her the ability to pay off the $ 10,000 in debt she had accumulated on multiple cards since she was a college student. She said she paid off the balance on two cards, worth about $ 2,500.

‘I don’t expect to pay it all off. I just don’t use my credit cards anymore, ”she said. “I want to make sure my credit score is good.”

In Europe, governments in the currency area have launched major stimulus programs to support consumers during lockdowns. These include grants to small business owners, grants to businesses to keep people on the payroll even when they weren’t working, and tax cuts.


Should incentive programs to help Americans expand? If so, what form should they take? Join the conversation below.

Lenders of all levels expected people to borrow more when the lockdowns started.

“But the exact opposite happened,” says Stephan Goebel, who runs a chain of pawnshops in Berlin’s working-class areas. “People came in and picked up their jewelry, gold watches and other valuables.”

US pawnshops, which typically serve consumers with low or no credit scores, report that lending has declined sharply, largely due to federal stimulus payments. Pawnshop borrowers have become buyers: Pawnshop sales of electronic equipment and other goods needed during lockdowns have skyrocketed.

“The federal government was quick to provide liquidity to the people in our client base,” said David Ashe, who runs La Familia, a chain of 41 pawnshops in Florida and Puerto Rico.


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People who kept their jobs also paid off their credit card. Without the chance to take expensive vacations, they have more money left over to lower their credit card balances that they have been carrying for years.

Geri McClean, a London-based chemical engineer for the oil and gas industry, made £ 10,000 ($ 12,600) in credit card debt over the years, without having the money to pay it off after holidays and send money back to her parents in Jamaica.

But now, blocked from traveling abroad, the 46-year-old has recently paid off all of her three credit cards. Yet Ms. McClean is concerned about the severe blow that the pandemic dealt to her industry. “It’s a good time to be debt-free,” said Ms. McClean, “because I won’t have a career anytime soon.”

Write to Matthew Dalton with and AnnaMaria Andriotis

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