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Credit card debt drops for first time in eight years, Experian says

Balances are down by 9%, despite pandemic and tough economy

Summary

For the first time in eight years, consumers’ credit card debt has dropped.

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Credit utilization numbers and late payment delinquencies have gone down, according to new data from Experian. But though the picture looks rosy, we might not be out of the woods just yet.

After escalating for eight years prior to 2020, U.S. consumers’ credit card debt dropped from $829 million in 2019 to $756 billion in 2020, which signified a 9% drop, the credit bureau noted in a Nov. 30 blog post.

And that 9% translates into more than $73 billion that consumers have paid down – since 2019, consumers saw their average balances drop by $879.

Experian noted that because balances dropped, consumers’ credit utilization numbers (the amount of credit they use versus the amount of credit available to them) dropped to 25%, which is the lowest number in 10 years.

In addition, late payment delinquencies have gone down.

The credit utilization drop could be a combination of consumers focused on paying down their balances and the pandemic’s lockdowns and business closures stunting spending. Additionally, federal stimulus measures might be responsible for the drop in credit card debt – many may have used that “windfall” to pay down debt.

But while balances dropped, new consumer credit card accounts have soared – according to Experian, U.S. consumers have opened 12 million new accounts since 2019.

“Understanding the factors that influence your credit history is key to protecting financial health during the road to recovery from the pandemic and beyond,” said Rod Griffin, senior director of consumer education and advocacy for Experian, in a news release.

“By lowering utilization and delinquencies, consumers have done the two most important things they can to improve their credit scores, which should position them better to emerge strong from the pandemic,” he added.

States with the biggest balances showed the largest decrease

Credit card debt dropped the most in states where balances were the largest.

The biggest average balance decrease happened in Washington, D.C.; it shrank by 20% compared with the national average of 14%.

The state in which consumers’ balances went down the least was North Dakota, which dropped only 8%, or 6 percentage points less than the national average.

See related: Poll – 23% of consumers added to their card debt during the pandemic

Credit card usage differs with age

The Silent Generation – those 75 and over – reduced their average credit card debt the most, shrinking it by 16% in 2020, while Gen Z adults decreased theirs by only 6%.

But Gen Zers dropped their average credit utilization rate by 4.7 percentage points, which is three times as much as the silent generation.

Gen Xers, the Silent Generation and baby boomers experienced decreased average credit limits in the past year (1%, 6% and 3%, respectively), while millennials and Gen Zers had theirs raised by 2% and 10%, respectively.

These numbers are hopeful, but they could change

At first glance, it’s surprising that credit card debt and delinquencies fell and credit scores rose during a sharp recession brought on by a global pandemic, said Ted Rossman, industry analyst at CreditCards.com.

Yet, that’s the reality in 2020.

Rossman said government stimulus funding deserves a lot of credit, as do lender hardship programs and the fact that consumers spent less and prioritized debt payoff. However, he warned that consumers are not out of the woods yet.

“Many households are still struggling, unfortunately, and COVID cases continue to surge – it seems like more stimulus is needed, and we don’t know if or when that will happen, or what it would look like,” Rossman said.

Without more stimulus, it’s possible that widespread delinquencies have been delayed, not avoided.

Rossman noted that while less debt is good from a household perspective, it reflects lower spending, which is a negative for card companies, retailers and the economy as a whole.

Bottom line

As financial uncertainty persists, you may find yourself turning to your credit cards to get through this challenging time, Experian’s Ron Griffin said.

“While credit cards can be a valuable financial tool when used wisely, they can also be a source of financial stress if you find yourself charging more than you are able to pay back,” he warned.

If you find yourself charging more than you can pay off, consider making a budget and sticking to it.

Or, if you really need to charge certain big-ticket items, have a plan in place to pay it back as fast as possible to avoid interest charges.

See related: Poll – Many U.S. adults plan to spend less after the pandemic than before

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