Changes to consumer debt and spending during the pandemic

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Many results of the coronavirus pandemic were unpredictable, and the government spending that came in response was unprecedented. There appear to be smoother economic waters ahead, though, with retail sales much better than expected in early 2021 due to stimulus payments and growing optimism.

Unemployment is still a large problem for many, although it’s dropped from over 13 percent to 6.1 percent in the 12 months leading up to April 2021. This comes after what was an unexpected rise from 6 percent in March. Market predictions were in the opposite direction—a continuing downward trend at a similar rate to previous months.

U.S. President Joe Biden has been attempting to pump up confidence, including a March 2021 statement that read, “After this long hard year, that will make this Independence Day something truly special, where we not only mark our independence as a nation, but we begin to mark our independence from this virus.”

However, as the country opens up again, there is still some uncertainty about what will happen economically in the future.

Consumer debt was at an all-time high in 2020

As reported by the New York Federal Reserve, housing debt in the U.S. went above $10 trillion for the first time in early 2020—a level it had just barely fallen short of in the 2008 financial crisis.

However, non-housing debt accounts for the majority of collections by third-party agencies, and it had already been hitting all-time highs from 2013 onward as its steady climb took it above crisis-era peaks. Consumer debt totaled $14.3 trillion in the first three months of 2020 and has since reached a new high of $14.6 trillion during the same timeframe in 2021.

Considering the relatively high rate of third-party collections in non-housing debt, it’s important to note how many consumers are struggling with debt collectors.

A survey previously reported by the Consumer Financial Protection Bureau indicated that roughly one in three Americans with a credit file had been contacted by at least one debt collector in the 12 months prior. The Bureau’s Consumer Credit Panel also reveals that over one-fourth of Americans have a third-party collection trade line on their credit report.

Some of the results of lockdowns and the pandemic, in general, were predictable, such as the extreme impact on the food and beverage sector, tourism and eldercare.

But these lockdowns had another unintended and much more unpredictable consequence: household debt actually went down for the first full quarter.

Record amounts of debt were paid off during the pandemic

COVID-19 and the following lockdowns resulted in lower consumer confidence. While this caused a decrease in expenditures across the board on durables and services, payments towards credit card debt increased significantly.

The American public paid off large amounts of credit card debt during 2020 and into the first three months of 2021. A total of $49 billion in credit card debt was paid in just the first quarter—the second largest drop in over two decades, according to the New York Fed’s Center for Microeconomic Study.

The largest decline was seen less than a year earlier, in Q2 2020, in which $76 billion of credit card debt was paid off, as seen in the CFPB’s annual report to Congress.

The debt collection agency TrueAccord reported a “near-instantaneous increase” in payments received as of April 15, 2020, which they largely attribute to stimulus money from the CARES Act.

In a report from July of that year, TrueAccord claimed a total increase of 25 percent in debt payments compared to the previous tax season.

Personal savings hit an all-time high

The average personal saving rate over the last 60 years is roughly 9 percent. In April 2021, the personal saving rate was more than triple the average, according to the U.S. Bureau of Economic Analysis, and reached a record high of 33 percent.

This was undoubtedly a result of government spending related to COVID-19, which increased personal income by over 10 percent, while personal expenditures were already low and still falling.

JPMorgan Chase Institute reported on the impact of increased unemployment benefits authorized by the CARES Act of 2020, as well as the financial situation of unemployed Americans before, during and after pandemic benefits.

Looking at anonymized data from Chase credit card and checking account customers who received unemployment benefits in July and August of 2021, an analysis of the data shows that unemployed Americans almost doubled their savings in mid-2020.

However, upon the expiration of the additional $600 added to their unemployment benefits, the unemployed spent more than half of what they’d saved up to that point in the month of August.

More Americans have student loan debt or medical debt in collections than any other type of loan

Unsurprisingly, two of the most significant types of debt in collections are due to student loans and medical debt.

Although the number of people with “seriously delinquent” student loan payments declined from 11.06 percent in Q4 2019 to 6.45 percent in Q4 2020, this was likely a very temporary result of the CARES Act provisions.

In Q2 2018, more than half of third-party collections were related to healthcare spending. Telecommunications and retail debt came in distant second and third positions.

How credit scores were affected by the pandemic

Americans have an average credit score of 711, according to FICO and as reported by Forbes. Older consumers are far ahead of their younger counterparts, with almost 100 points separating Generation Z (18 – 23) from the Silent Generation (75+).

An online survey revealed that 87 million Americans are nervous about how their credit score will cope with COVID-19 and everything that comes with it. Mortgages and rent payments were unsurprisingly high on the list of worrisome outcomes, placing first and second with survey respondents, and credit card bills were in third place.

Almost nine out of 10 consumers say missed payments should have no effect at all on credit scores while the pandemic is still happening. However, only a little over half of respondents predict they’ll be worse off financially for six months or more, and 71 percent are expecting to see their credit score hold its ground or continue to climb.

As the stimulus money eventually stops and the other hardship provisions enacted by Congress are phased out, it’s likely that many consumers will struggle with payments and may find it difficult to keep a good credit score.

We’ll have to see how the country’s—and individuals’—economic health evolves going forward. In the meantime, if you’re experiencing difficulty with your credit, a credit repair service might be able to help.

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