3 surprises about credit cards and COVID-19

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It has been about five months since the COVID-19 pandemic ramped up in the U.S. So far, there have been three credit card developments that have really surprised me.

Keeping up with the bills

Back in March, I projected that delinquencies and defaults would skyrocket. That’s what normally happens when unemployment increases. I thought it would be especially true this time around because of the speed of the crisis. We went from the lowest unemployment rate in 50 years in February to the highest in 90 years in April.

So far, the delinquency and default rates have barely budged, however. I believe the government stimulus programs deserve a lot of praise (especially the stimulus checks, the expanded unemployment benefits and the Paycheck Protection Program).

I still fear that the anticipated rises in delinquencies and defaults could be yet to come, as the stimulus is wearing off, and COVID cases have been hitting new highs and necessitating a second wave of business restrictions.

Discover’s CFO, John Greene, made a similar prediction during his company’s recent earnings call: “I think a good way to think about it is charge-offs elevating in ’21, perhaps peaking in the later part of ’21 depending on the economic scenario that we’re dealing with and then starting to tail off in ’22 … We think [delinquencies] will start to tick up in the fourth quarter [of 2020], perhaps as early as the third quarter, but we’re not seeing any indicators yet, and then continue into 2021.”

The expanded unemployment benefits recently expired, and I’m closely watching the negotiations between Congress and the White House to see what additional help is coming. I think it’s needed.

Travel cards when you’re not traveling

Another silver lining has to do with annual fee credit cards. These mostly focus on travel, so my knee-jerk reaction was that a lot of cardholders would look to cancel. I thought it would be hard to justify paying these fees – which often run from $95 all the way up to $550 per year – with so few people flying and staying in hotels during the pandemic.

Instead, more than 8 in 10 annual fee cardholders are at least as satisfied with these cards now as they were pre-COVID, according to a recent survey conducted by our sister site CreditCards.com. That includes 58 percent who believe they’re getting about the same value from the cards and 23 percent who feel they’re getting even more. Just 19 percent are reporting less value at the moment.

Similar to how government stimulus has warded off a surge in delinquencies, smart adjustments by card issuers have prevented annual fee cardholders from rushing to the exits. These include annual fee waivers, credits for streaming and cell phone bills and enhanced rewards on categories such as groceries, food delivery and takeout.

Aversion to debt

Americans’ total revolving debt (mostly credit cards) fell 10 percent from February to May 2020 (the most recent months the Federal Reserve has reported). It was a combination of consumers spending less and aggressively paying down their balances. We saw that during the financial crisis, too.

Total revolving debt peaked just over $1 trillion in May 2008. It slipped below $1 trillion in February 2009 and remained there until October 2017. The bottom was $833 billion in May 2011. That was a drop of approximately 18 percent from peak to trough.

Revolving debt eventually hit a new high, roughly $1.1 trillion in February 2020, before falling precipitously as COVID-19 shuttered businesses this past spring.

What’s most interesting since then is how debit and credit card spending has diverged. In January and February, spending on both types of cards was tightly correlated and up close to 10 percent year-over-year, according to Bank of America.

Debit spending surged briefly in March, then debit and credit both plunged around the middle of the month, bottoming in April. Credit’s bottom was much deeper, however, and the spread between debit and credit remained considerable as spending rebounded.

In fact, debit card spending was in positive territory for virtually all of June, often in double digits. Credit card spending has been down more than 10 percent year-over-year for months, and it tailed off to end June down almost 20 percent from a year earlier.

Debt aversion is a big part of this. During the company’s earnings call, Bank of America executives speculated that another factor is travel and dining purchases are more likely to go on credit cards, and those categories have experienced some of the steepest spending declines.

That’s true, although I’ve never understood this behavior. It’s really odd to me that essentials such as groceries tend to go on debit cards, while discretionary purchases skew more towards credit.

Fearing debt? Use your credit card like a debit card

I totally get the desire to avoid debt, especially when so much is uncertain. But credit cards offer vastly superior rewards and consumer protections than debit cards. I believe the best course of action is to use a credit card like a debit card – paying it off in full each month to avoid interest, while earning rewards and enjoying better security.

Have a question about credit cards? E-mail me at ted.rossman@bankrate.com and I’d be happy to help.