Despite massive job losses in the coronavirus pandemic, cardholders aren’t yet falling behind on their payments. Federal government aid has softened the blow, but a quick recovery seems unlikely. Here’s what you can do if you’re struggling with credit card debt.
While a lot of the economic pain caused by the COVID-19 pandemic has started showing up in the data – the highest unemployment rate in 90 years, the sharpest drop in retail sales on record, an unprecedented fall in consumer confidence – one area that has not changed much (yet) is the credit card delinquency rate.
Of course, it’s still early. COVID-19 didn’t really ramp up in the U.S. until mid-March. Economic data tends to lag, and that’s especially true for delinquencies, which by definition don’t kick in until 30 days after the payment was due. Indeed, a May 20 report from TransUnion showed severe credit card delinquencies slightly fell between March and April.
There’s hope within the credit card industry that two key factors will lessen the blow.
The first is that the federal government acted quickly with massive stimulus programs. The coronavirus stimulus package provided one-time payments of $1,200 for most adults and $500 for children. It also expanded the amount and duration of unemployment benefits. And the Paycheck Protection Program gave forgivable loans to small businesses to help them keep more people on their payrolls.
All of this has been tremendously helpful, but temporary. Congress is currently at odds regarding additional stimulus. Without more aid, many households are at risk of falling behind on their bills.
The second key factor limiting delinquencies thus far has been the hardship programs enacted by card issuers. Apple Card and Wells Fargo have been the most generous, allowing cardholders to skip payments for up to three months without interest accruing. Many others are lowering interest rates, waiving fees and offering their own skip-a-payment plans (typically with interest tacked on at some point).
Card issuers are nervous that cardholders won’t pay them back
Issuers remember when credit card charge-offs (payments so late they’ve essentially given up hope of ever seeing that money again) exceeded 10% for a full year, from the third quarter of 2009 through the second quarter of 2010.
That timing is notable because the National Bureau of Economic Research reported the economic cycle peaked in December 2007 and bottomed in June 2009. Yet charge-offs remained at that very high plateau for a full year after the trough.
It makes sense because charge-offs take time to filter through the system. They’re typically defined as payments that are 180 days past due. The unemployment rate also remained stubbornly high back then. It fluctuated between 9% and 10% from April 2009 all the way through September 2011. There’s a general rule of thumb that the charge-off and unemployment rates tend to (roughly) match one another.
It’s encouraging that consumers entered the COVID-19 pandemic in much better shape than 2007-09. At the end of 2019, the charge-off rate was just 3.69%, according to the Federal Reserve. And a mere 2.61% of balances were otherwise delinquent.
Both rates were approximately three percentage points higher at the end of 2008. Banks, too, are healthier this time around (in part because of regulations enacted after the financial crisis).
Conflicting signs regarding credit card debt
Americans’ total credit card debt fell by $34 billion in Q1 2020, per the New York Fed. That was a larger drop than anticipated, even accounting for the fact that Q1 is usually a time when consumers embrace debt payoff as a post-holiday financial detox.
Visa reported a 31% decline in U.S. credit card payment volume from April 1-28, 2020, compared with the same dates a year prior. That was caused by the lockdown measures that left fewer things to spend money on plus a sense of caution that had cardholders tightening their belts and prioritizing debt payoff (if they could).
Unfortunately, a lot of people are really struggling. About 38 million Americans filed initial jobless claims from mid-March through mid-May. A CreditCards.com survey found 28 million people went deeper into credit card debt during the same general time frame.
It’s the proverbial tale of two cities – some people are working from home, spending less and putting more toward their debt and savings (the personal savings rate hit a 39-year high in March, the Bureau of Economic Analysis stated). Sadly, many others are earning less or are unable to work at all, and that’s pushing them deeper into debt.
The path forward
The biggest economic question in recent weeks has been the shape of the eventual recovery. Early hopes of a V-shaped rebound have diminished. Federal Reserve Chairman Jerome Powell told “60 Minutes” on May 17 that a full recovery might take until the end of 2021. He anticipates the unemployment rate could peak between 20% and 25%, 5-10 percentage points above its current level.
And the Q2 2020 GDP figure could be in the negative 20%-30% range. Many are speculating about a W-, L- or Nike Swoosh-shaped recovery.
While no one knows for sure, the main point is that it’s unlikely the economy will bounce back quickly, which is tough news for people struggling with credit card debt, and it points to an eventual surge in delinquencies and defaults.
See related: Coronavirus: How to deal with credit missteps
Your best move right now is to play defense. Ask for a break – just 7% of credit card debtors have done so, our recent survey uncovered – and conserve cash for near-term necessities.
If you don’t have much savings or much money coming in, don’t be in a rush to put your stimulus or unemployment benefits toward your credit card debt. You can get relief from your card issuer.
Particularly at a time when many issuers are cutting credit lines to manage risk, your credit card shouldn’t be your sole emergency fund.