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Home / Business / America ‘s debt bondage in the second quarter of 2020: The credit card phenomenon

America ‘s debt bondage in the second quarter of 2020: The credit card phenomenon



Consumer debt to GDP surged, but why did credit card balances decline and new infringing debt decreased?

By Wolf Richter for WOLF STREET.

OK, as I mentioned on Friday, things are a bit crazy in consumer debt right now: No Payments, No Problem: The New World of Strange Consumer Debt. But there is another aspect of it – the indebted American slaves themselves. And there are all kinds of things going on.

Consumer debt – student loans, car loans, credit cards, other revolving loans and personal loans but excluding mortgages and HELOCs – has been reduced to 4, $ 1 trillion (seasonally adjusted) in the second quarter, according to Federal Reserve data. It declined because credit card debt fell ̵

1; we’ll get there in a second. But as the economy expanded in the second quarter, with 32 million people claiming unemployment insurance, consumer debt as a percentage of “nominal GDP” soared from a record high of 19.2% at the end. Good times in Q4 2019 and Q1 2020 to 21% by the end of Q2:

This ratio of consumer debt to nominal GDP shows the debt burden on consumers in general terms of the economy. Neither consumer debt nor nominal GDP are adjusted for inflation, and the impact of inflation over the years will remove this rate. So this spike is another way of looking at the consumer plight in this Pandemic economy.

The credit card phenomenon.

Revolving consumer credit includes credit card debt and other revolving credit such as personal loans. Credit card debt itself – the data set provided by the New York Fed in its Household Credit Report – fell $ 82 billion in the second quarter, to $ 820 billion.

Credit card debt often falls in first quarter, when consumers try to get over the hangover after holiday shopping. But the only time it refused in second quarter during and after the Great Depression when consumers were forced into a severe recession: 2009, 2010 and 2012, and only 1% to 2.4%. But in Q2 2020, credit card debt fell 9%! This decrease in intensity has never happened in any Quarter back to 2000:

In Q1, the strongest drops came in April and May and lasted in June with lower levels.

But all other Combined household credit portfolios – mortgages, HELOCs, car loans, student loans and other credits – increased almost as much as reduced credit card balances.

Also, the new credit card balance is overdue fall – the opposite of what you would expect them to do in an unprecedented unemployment shock.

During the Great Depression, when job losers reduced their credit cards, new debt balances skyrocketed to almost 14%. These are not just subprime, but all the balances combined! Then, during and after the Great Depression, when lenders and consumers went through a painful purging process, new outstanding balances fell and eventually hit two-decade lows. in early 2016. They then rebounded during the Good Times as the subprime segment went into trouble funding these Good Times. But in the second quarter, the pandemic economy exploded, and suddenly the new balance was delayed reduction up to 6.2%:

Why did my credit card balance decrease and my new balance decreased?

Nearly all consumers below a certain income level receive benefits, and most people who lose their jobs receive either a regular unemployment benefit or a new federal unemployment benefit, plus add 600 dollars a week. It is difficult to earn regular unemployment benefits. But with $ 600 a week extra work, many people get more unemployment benefits than they earn in their jobs.

According to a study by the Becker Friedman Institute of Economics at the University of Chicago, “two-thirds of workers eligible for unemployment insurance can receive benefits in excess of their lost income and one fifth can get benefits. level is at least double the amount lost ”.

Combine this with numerous studies that find that about half of all households do not have enough cash in a relatively small emergency savings account, such as $ 500.

And the picture emerges that many people operate their cash flow needs like companies: From the revolving line of credit.

For consumers using credit cards, nearly all payments, except for housing payments, flow through them. And those who don’t pay off their monthly balances will pay dizzying interest on those unpaid balances. When these consumers get cash, such as stimulus checks or an additional $ 600 per week, they will use it to pay their credit cards, which helps to cut down on their interest expenses, instead because they put in a savings account where they earn nothing. Here’s a smart thing to do.

Most stimulus payments came in April and May and contributed to the plunge in credit card balances during those months. And then, when consumers buy something, they use their credit card again.

Some consumers have used stimulus money this way to catch up with credit card payments they have been slowing down for, and others are not slowed down when paying with their credit cards. They because of the stimulus money, which will partly explain a decrease in the new term balance.

Another pandemic trend is that credit card companies are offering credit card deferrals if they run into trouble, according to the theory of renewal and pretend. Under these deferred programs, payments will apply and the credit card loan is considered “current”, although no payments are made until the end of the deferral period. . This also reduces the rate of new credit card balance overdue.

And loan standards are being tightened.

Banks, concerned about a major dislocation in consumer credit and expecting massive damage to their consumer loans, have lowered credit lines and / or closed flagged consumers. for any reason.

During the two months through mid-July, another 66 million people had at least one credit card canceled and / or the credit limit decreased, after 50 million people had their credit card canceled and / or the credit limit was reduced in Last month, follow to CompareCards card. Most people have more than one credit card, however, there is still a significant tightening in the ability to provide credit.

The report indicates that these actions take place across the board, but some are affected more severely than others: For example, in age groups, millennials are more likely to report. that the credit card has been canceled and / or the credit limit is reduced; and in terms of income type, the top earners are more likely to have reported one or both of these actions.

Closing actions and reducing the credit limit do not reduce the credit card balance immediately but prevent these cardholders from increasing their balance on those cards.

So a complicated picture emerged of stimulus payments and an extra $ 600 a week flowing not only into consumer spending, but also on credit card balances, while banks are on the way. reduce the exposure of your contingent credit card debts and allow cardholders who are already in trouble to defer payments. to avoid having to pre-order overdue.

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