Data show delinquencies remained near all-time lows in Q4 2020, due in part to hardship programs enacted by financial institutions and the government. Experts weigh in on what’s to come in 2021.
The pandemic threw many Americans into financial disaster, but credit card delinquencies surprisingly declined during the health crisis.
According to the Experian 2020 Consumer Credit Review published in January 2021, the number of accounts one month past due fell by 37%, two months past due by 36% and three or more months past due by 53%.
And although the American Banking Association reported that consumer delinquencies rose in the fourth quarter of 2020, it noted that credit card delinquencies remained near all-time lows.
“Consumers have done a good job of managing their spending throughout the pandemic and paid down their credit card balances at a record pace last year,” said Rob Strand, ABA senior economist, in a news release.
He went to say that during the pandemic, online purchases climbed, but that consumers continued to prioritize their credit card payments.
“At the same time, card issuers have worked with customers who have experienced economic challenges related to the pandemic,” he said.
But will delinquencies rise once the pandemic – and help from card issuers and the government – is over?
Keep reading to see what industry experts think will happen in 2021.
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Congress and banks stepped in to help consumers
When unemployment numbers dramatically rose last March, observers presumed that default rates would rise in lockstep, said Martin Lynch, compliance manager and director of education at the nonprofit Cambridge Credit Counseling Corp.
But Congress quickly responded by passing the CARES Act that same month: The distribution of stimulus payments began in April and other efforts followed in short order, including the PPP loan program for businesses, unemployment support for states and forbearance for federal student loans and federally backed mortgages.
Major banks also stepped in and offered relief, trying their best to keep their clients afloat in the hope that the pandemic would exit as quickly as it came.
All of these efforts have combined to help mitigate the economic effects of the virus, but the long-term effect is the subject of considerable debate, Lynch said.
Have the various relief efforts only put off the inevitable? Will the economy enter a significant recession once the forbearances end?
Default rates might give insights into future delinquencies
A closer look at default rates, Lynch said, may be the key that unlocks the answers to the questions above.
In ordinary times, loan default rates are simple data that show how many borrowers are paying and how many aren’t.
The CARES Act included a clause allowing that a loan in forbearance need not be reported as delinquent if it was current when the forbearance was granted.
Now that some of the dust has cleared, it’s apparent that at least some loans that were delinquent prior to the pandemic were also granted forbearance, Lynch explained, and that those loans were reported to the credit bureaus as current.
This means that looking at default rates alone isn’t enough to get an idea about how borrowers are performing during the pandemic.
To get more accurate results, Lynch said, we need to look at the number of defaults as well as the number of loans in forbearance.
But even this approach might not yield a definitive answer because no one knows whether the sheer number of forbearances consists solely of borrowers who were in dire need of assistance or whether that number also includes borrowers who simply took advantage of a pause in payments because it was offered, he pointed out.
And beyond all that, Lynch added, the effect of unemployment support and stimulus checks must have come at a critical moment for at least some of these same borrowers, allowing them to avoid delinquency and earn the forbearances extended to them.
Banks don’t believe we are out of the woods yet
Ted Rossman, senior industry analyst at CreditCards.com, views all delinquency stats, which have fallen across the board, through the lens of pandemic relief.
“It’s not what we expected at the onset of the pandemic, and it’s artificial, but the stimulus and accommodation programs have helped tremendously,” Rossman said.
The big question now is, what happens moving forward?
Will there be more stimulus and accommodations once the current programs expire? Will the metaphorical bridge that has already been built be enough to carry us through to the other side?
Rossman is hoping for the best and he said there are many reasons to be optimistic, but banks don’t believe we’re out of the woods yet.
While many have begun to release some of the loan-loss reserves they stockpiled in the early days of the pandemic, they’re proceeding cautiously, Rossman pointed out.
They still have significantly elevated reserves and are watching the situation carefully. Many have begun to ease their lending standards a bit, but we still see a lot more caution than we did just prior to the pandemic.
Much of this will depend on how the health situation plays out – with the vaccine rollout and the COVID-19 variant progression – and what the government and consumer responses are.
“We’re optimistic that we’re close to the end of this, but sadly some people are in deep holes created by extended unemployment,” Rossman said.
Several sectors are doing great, others are on the mend and some will be slow to recover, he added.
For example, he said, over the past year, goods have mostly outperformed services – E-commerce, electronics, furniture and other home goods did very well, while travel and restaurants were among the worst performers.
But that’s starting to change.
So, Rossman said, if you work in a restaurant, it has been a very tough year, but if your savings, unemployment benefits and stimulus payments kept you afloat, the hope is you won’t be delinquent going forward because now you’ll be making more money.
Many forbearances will turn into defaults
Lynch said it’s not unreasonable to look at all of this delinquency data and conclude that low default rates are a mirage and that the country’s economy isn’t as healthy as the default rates would suggest.
A fair amount of the forbearances granted will turn into defaults when those programs end, but we won’t know for certain until it happens, he said.
What we can say for certain is that, to their credit, the federal government and a large number of private lenders worked hard to build an economic bridge to the other side of the pandemic.
If they were successful, we’ll have learned lessons that could be applied if something like this happens again. And if some of those efforts turn out to have been in vain, we’ll have learned something else that might still be useful.
If you have loans in forbearance, act now
Consumers with loans in forbearance need to take stock now before those payment holidays come to an end, Lynch warned.
For example, we know that federal student loan payments are set to resume in October 2021, so those borrowers should prepare a budget now to ensure they’ll be able to handle the payments when they start coming due.
The same approach will work for other loans, though lenders won’t have the same flexibility as student loan servicers.
“At this point, I’d be making sure my budget accurately reflected appropriate repayment priorities,” Lynch said.
If you can’t meet your obligations, consider talking to a nonprofit credit counselor to review your budget and credit report, then go over your options, Lynch suggested.
You’ll also want to let your creditors know what’s happening before you start missing payments, Lynch advised; “It’s the adult thing to do, and they may be able to help.”
What happens now very much depends on your individual circumstances, such as the industry you work in and how much savings you have, Rossman said.
Ironically, many people’s finances have improved during the pandemic because they were able to save more and spend less and their home values and investment portfolios grew, he added.
But, sadly, others have not shared in these gains, Rossman said, and they’re the ones who could cause the delinquency stats to rise once stimulus and accommodations run out.
See related: How to protect your credit during the coronavirus crisis