Americans started 2021 with markedly better credit and lower credit card debt, on average than a year before. The question is, as the economy starts to re-open post-pandemic, can they keep up the trend?
“We’ve seen consumers during the pandemic that saved a whole lot and started paying it down,” said Beverly Harzog, credit card expert and consumer finance analyst at U.S. News & World Report.
The average credit score increased by 1 percent (7 points) in 2020, according to Experian. Credit scores have been steadily inching up since the Great Recession—a total increase of 21 points over the decade—with last year’s increase accounting for a full third of the rise.
While credit scores rose, credit card debt plunged, dropping 14 percent last year. Consumers paid down a whopping $76 billion in credit card debt in the second quarter of 2020 alone, the New York Federal Reserve reported. But equally or even more striking, as the coronavirus vaccines began to roll out, and the economy started to open up, Americans continued to pay down their debts, wiping out $49 billion in credit card balances in the first quarter of 2021.
Some more credit card debt statistics, according to Experian:
- The average credit card balance was $5,315 in 2020, down from $6,194 in 2019
- Average credit utilization (the percentage of credit a consumer uses of the total credit available to them) dropped 12 percent in 2020, from 28.8 percent in 2019 to 25.3 percent last year. Lenders prefer a credit utilization rate of 30 percent or less.
- Increases in student loan debt (up 9 percent), car loan debt (up 2 percent), mortgage debt (up 2 percent), and personal loan debt (up 2 percent) somewhat offset the 14 percent drop in credit card debt last year. Those non-credit-card debts, however, generally offer lower interest rates. And still, the increase in average, overall consumer debt, year-to-year, was small, up 0.3 percent, from $92,479 to $92,727.
Experts readily admit that this was not the picture they expected to see when the world shut down in March 2020. “When we saw what was happening with COVID-19, the logical assumption was that credit card balances would increase and debt would go up because people were using credit cards to offset reduced income,” said Rod Griffin, director of public education for Experian. “But we’re potentially coming out of [the pandemic] in a better financial place than when we started.”
This may be due, at least in significant part, to innovative federal policy that sent stimulus checks to most Americans, provided enhanced unemployment benefits to those who lost work due to the pandemic, suspended evictions and offered forbearance on mortgage and student loans.
In previous recessions, federal help has been more targeted—for instance, during the Great Recession, the government lowered interest rates and wrote down distressed mortgages. “This [pandemic] policy was really harder hitting in terms of people’s pocketbooks,” said Fiona Greig, co-president of the JPMorgan Chase Institute. “It gave them cash on hand.”
In a conference call, researchers for the Federal Reserve Bank of New York called the recent drops in credit card debt “remarkable” and noted that the stimulus and the forbearance mandates “clearly played a big role” in this unusual consumer response to a recession.
This last year, if nothing else, has shown that “when people have the opportunity, they do want to pay down debt,” Harzog said. “They do want to have a savings account.”
Credit card debt by state and by age group
Yes, credit card balances dropped across the nation in 2020. But when you start to break the numbers down geographically and by age group, the story becomes more nuanced.
Washington, D.C. saw the biggest drop in credit card debt (20 percent), followed closely by Alaska and California, at 18 percent each, according to Experian. On the low end, North Dakotans managed to pay off 8 percent of their debt last year.
Overall, the top 10 percent of states (plus the District of Columbia), saw credit card balances drop between 17 percent and 20 percent in 2020. The next third, or 16 states, notched drops between 14 percent and 16 percent. The great majority of this top 40 percent of states was on either the West Coast, New England or the Eastern Seaboard from Virginia north (the exceptions being Alaska, Arizona, Colorado, Hawaii, Illinois and New Mexico).
Two characteristics distinguished most, though not all, of these states: traditionally, they are the states where residents tend to carry the highest credit card debt load, and they were the states that had the strictest lockdowns for the longest period of time during the pandemic.
The remaining 30 states saw drops in credit card debt between 8 percent and 13 percent last year. Nearly all of these states—the exception being Pennsylvania—are in the West, Midwest or South. Many of them started the pandemic with some of the lowest credit card debt in the country. Many also had some of the least restrictive lockdowns, or the shortest lockdowns, in the nation during the pandemic.
How much you paid off your credit card debt last year may have also had a lot to do with how old you are. Borrowers young and old alike paid down their balances by about 10 percent in the spring and summer of 2020, but then the trends diverged, the New York Federal Reserve reported. Younger consumers—perhaps not coincidentally, also those less at risk for COVID-19 complications—started to spend again in the fall. By the end of the year, their balances were nearly back to their previous level. Older borrowers, particularly those over 60, continued to pay down their card debt, except for a seasonal increase at the end of 2020.
Americans were managing credit well even before the pandemic
To Griffin, of Experian, the sea change in the way Americans think about credit started not last year, but more than a decade ago. That’s when the Great Recession hit. Many U.S. consumers at the time had more debt than they could afford. Since then, debt levels have still increased, but, according to Griffin, more slowly than before.
“People seemed to be managing their credit well,” Griffin said. “It wasn’t as if people were out spending recklessly for the last decade and then COVID-19 hit and they stopped.”
So when the stimulus checks and the enhanced unemployment benefits began rolling in last year, Americans were already armed with healthier spending and savings habits, and knew what to do with the money they received, he said.
Who saved, who spent and why
In March 2020, Fiona Greig’s research team at JPMorgan Chase Institute suddenly tossed its other projects aside. There was now only one question to answer, she recalled: how would Americans spend, or not spend, their money in lockdown?
It turned out the answer was more complex and nuanced than they could have known, thanks to the infusion of federal cash (stimulus checks, unemployment benefits) and the moratorium on certain payments (student loan debt, mortgage loans, rent). Among the findings:
- Benefits differed by race. Black families started 2020 with lower bank balances than white or Latinx families. They saw the smallest increases in dollar terms but the largest in percentage terms, from the various government payments and programs.
- Less affluent households spent their balances more quickly than wealthier households. These poorer households were more likely to be Black or Latinx, and headed by single women.
- Wealthy families who did not receive stimulus checks or enhanced unemployment benefits nevertheless maintained higher bank balances than before the pandemic, largely due to decreasing their spending during the lockdown.
Given this larger picture, Greig was not surprised to learn that Americans hacked away at their credit card debt over the past year. Not only did many have a cash infusion, but particularly for those who have student loan debt, a significant, urgent monthly payment was temporarily but instantly sidelined. The federal government suspended mandatory loan payments for all borrowers, halted collections and dropped student loan interest rates to zero—a policy that extends until at least September 30 of this year.
“People did with (their extra money) what they felt they needed to do. And some people paid off expensive credit card debt,” Greig said. “That was a smart thing to do with that money.”
Keeping your new good habits
For those who have managed to drive down or eliminate their credit card debt in this past year, now’s the time to keep the progress going. Look at the spending you didn’t do during the pandemic, and ask yourself if you can keep any of that frugality going now that the world is opening back up, Harzog said.
For Harzog, that means making her own food. Pre-pandemic, she specialized in restaurants and takeout dinners. “What I discovered during the pandemic was that I like to cook,” she said. “Now I’m not going to be eating out as much as I did before.”
What comes next?
Many COVID-related mortgage loan forbearance periods are coming to an end, if they haven’t already. The federal moratorium on evictions is set to expire on July 31, 2021, though some localities plan to keep their moratoriums in place through the end of the summer. Student loan payment suspension is set to expire at the end of September.
“Will people continue to make those kinds of payments on time? Or will those payments prove to be a stumbling block?” Griffin said. “Again, I’m hopeful, because of what we saw people do during the pandemic, that they’ll be better positioned to pick up where they left off and continue to do well.”