Americans’ Credit Card Balances Just Plunged By A Record $76 Billion

Credit card balances for US households plunged by the most on record in the second quarter, The New York Fed said Thursday.

The data, from the latest Quarterly Report on Household Debt, underscores the dramatic impact of lockdowns and containment protocols on consumer spending. It may also suggest that Americans thought twice about effectively taking out high-interest loans during a period characterized by mass layoffs and extreme economic uncertainty.

Due to the pandemic and related social distancing orders, “credit card balances fell sharply by $76 billion”, the Fed remarked, in the press release. “This was the steepest decline in card balances seen in the history of the data”.

It is relatively rare for Americans’ credit card balances to fall during the second quarter of a given year. They normally decline in the first quarter as spending normalizes after the holiday surge, but as Fed researchers wrote in a blog post published in conjunction with the release of the Q2 data, “declines in credit card balances in the second quarter of any year have, thus far, only been seen during the Great Recession”.

The same post (from Liberty Street Economics) breaks things down by month. As you might imagine, April witnessed a veritable plunge.

The same post notes that “foreclosures — which were at historic lows before the pandemic hit —¬† have stopped almost entirely [while] bankruptcy filings slowed down sharply in April when most courts were closed, but have trickled up slowly since”.

Ultimately, the message is that for the first time ever, “the dynamics in household debt were driven primarily by a sharp decline in credit card balances”. All in all, total household debt decreased by $34 billion in the second quarter.

It was the first decline in a half-dozen years, and the biggest drop since the second quarter of 2013.

This should probably be considered alongside the explosion in the personal savings rate, soaring deposits, and mammoth inflows into money market funds, when you contemplate the outlook for the US economy, which lives and dies by consumer spending.

While I suppose it’s a positive development that Americans are “learning” to save again and eschewing purchases financed by credit carrying extremely punitive interest rates, the entire system is, in a very real sense, built on a foundation that assumes irresponsible spending habits.

Food for thought.


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6 thoughts on “Americans’ Credit Card Balances Just Plunged By A Record $76 Billion

  1. GDP plunged by some 30+% annualized. Aggregate income roughly flatlined with the unemployment benefits and other fiscal policies. Americans chose to save and/or pay down debt due to uncertainty about the future.

    Not sure the numbers align very well, but the general story at least makes sense on the surface.

  2. Post pandemic, all those USD currently finding their way into US equities are creating an outsized demand.

    USD from additional savings, from banks who have received cash from unprecedented pay down of cc debt, and from the hundreds of thousands of stock trading accounts opened up at Robinhood, etc. will no longer be chasing US equities. Instead, the cash will get spent in the economy.

    True, earnings should go up. However, the demand for US equities (and the PE ratios) will drop like a stone.

  3. Which equates to something like an average balance decrease of $400. Something tells me this is probably a precursor at best.

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