Over the past few years, credit card balances have been paid off and delinquent accounts have become less common. But two years into the COVID-19 pandemic, those trends — spurred by increased savings and relief programs — could evaporate, especially as inflation soars.
The pandemic economy has unexpectedly changed the finances of many households for the better – personal savings have increased and debt has decreased. Now, however, inflation is high, inflows like advanced child tax credits and expanded unemployment benefits have ended, kids are back in day care, and parents are back in the office. The financial habits we had in 2020 and 2021 are unlikely to last. Here’s a look at how credit card usage in particular has changed, and how people can protect their credit as personal finances are about to change again.
Cardholders used their limits less
Over the past decade, credit card balances have hovered between 23% and 24% of their limits, according to data from the Federal Reserve Bank of New York. But in the second quarter of 2020, they fell to 21%. That seems like a modest drop, but that 2-3 percentage point difference is significant when you’re talking about hundreds of billions of dollars in total debt.
It was the first time since at least 1999 that credit card balances were at 21% of their limits. They reached 20% in the first three quarters of 2021.
A drop in usage can occur due to higher credit card limits, lower balances, or a combination of both. During this period, the decline in usage was primarily due to lower balances.
Sales have also dropped
Nationally, credit card balances have typically totaled about $800 billion over the past five years, according to the New York Fed. From the first quarter of 2020 to the first quarter of 2021, credit card balances fell nationally by $123 billion, or nearly 14% – the largest single-year drop since 2001.
These national balances increased in the third and fourth quarters of last year, but the end of the year came with increases in credit card balances in each of the last five years, as spending increases around the holiday season. When data for the first quarter of 2022 is released in the coming weeks, it will indicate whether this most recent jump was seasonal or the start of a more sustained climb.
At the state level, per capita balances fell in all 50 states and Washington, D.C., from late 2019 to late 2021. They fell the most in California, Hawaii, Oregon, and Rhode Island, where they fell 13% during this period. period. View all per capita balances at the state level here.
Fewer overdue accounts
The share of newly overdue credit card accounts began to decline in the second quarter of 2020, when the pandemic began to hit its full swing. This downward slope has continued ever since. In the last quarter of 2021, it stood at 4.1%, the lowest in at least 18 years, according to the New York Fed.
In addition, the share of credit card accounts being in charge of — when a bank writes off severely overdue debt as uncollectible — fell below 2% for the first time since at least 1985, according to St. Louis Fed data.
The decline in overdue accounts, however, was not unique to credit cards. Programs designed to cushion the potential economic effects of the pandemic on households – such as mortgage forbearance and student loan payment breaks – meant that the share of total debt going into new delinquencies also began to decline in the first half of 2020, reaching an 18-year low of 1.9% in the third quarter of 2021.
What could reverse these positive trends
Pandemic relief programs such as rent assistance, mortgage forbearance, advanced child tax credits and stimulus payments have all helped Americans save more. This increase in personal savings meant having more money to pay for goods and services directly, and more money to pay off debt. But as these programs have declined, personal savings rate. As a result, many credit card holders will likely soon find themselves in situations similar to where they were before the pandemic began. Paying off some credit card debt can only help manage household finances if cardholders are able to stay debt-free.
Inflation is perhaps the biggest factor against lower credit card balances and current accounts.
In response to expected price increases, some people may feel pressured to make major purchases now to avoid spending more at a later date. At the other end of the spectrum, consumers with lower discretionary income will feel a pinch of the price increase. With the cost of food, gas, and just about everything else eating away at a limited amount of money, credit cards can once again be a lifesaver.
Managing Credit Cards in 2022 and Beyond
The ability to stick to good credit habits may fluctuate over the years – especially in the face of household and global economic turmoil – but keep these best practices in mind as a goal.
Don’t spend more than you can repay in a month
Paying off your balance each month keeps your credit healthy, or even “great” according to credit bureau systems. The myth that you have to go into debt to keep improving your credit is just that, a myth.
And carrying a balance from one month to the next quickly increases interest charges. For example, racking up $2,000 in credit card debt and making only a minimum payment would cost about $2,870 in interest, on average — more than double the cost of what you bought — and would take over 16 years to complete. for repay.
Keep utilization below 30%
Having a balance over 30% of your limit on any card or all of your accounts can damage your credit, not to mention make it difficult to pay back if life throws something like a job loss at you.
If you hit a wall, make at least the minimum payment
In times of financial hardship, you may find it difficult to fully pay off your credit card balance. In these cases, making only the minimum payment is perfectly acceptable. Although paying the minimum can be a recipe for hundreds or even thousands of dollars in additional interest, small payments are better than no payments at all.
Know when (and where) to find help
If the minimum payment on your credit card(s) becomes unmanageable, the first person to contact is your card issuer. More than one in 20 Americans participated in a difficult credit card program between March 2020 and November 2021, according to NerdWallet’s annual household debt analysis. But credit card difficulty programs are not just a pandemic relief program. They are designed to help people who are having difficulty paying their bills due to many types of problems – unemployment, illness and natural disasters, for example.
If you continue to struggle with your debt, consider a credit counseling or debt management program. Many of these programs are free and can help you put a plan in place to get your debt under control or guide you through the option of filing for bankruptcy.