Consumer indebtedness to GDP is increasing, but why have credit card balances decreased and new arrears decreased?
By Wolf Richter for WOLF STREET.
OK, as I mentioned on Friday, things are a little crazy in the consumer debt space right now: no payment, no problem: bizarre new world of consumer debt. But there is another aspect – that of the American debt slaves themselves. And all kinds of things happen.
Consumer debt – student loans, auto loans, credit cards, other revolving debt, and personal loans but excluding mortgages and HELOCs – fell to $ 4.1 trillion (non-seasonally adjusted) in the second quarter, according to the Federal Reserve. It declined because credit card debt was falling ̵
This ratio of consumer debt to nominal GDP shows the aggregate consumer debt burden. Neither consumer debt nor nominal GDP is adjusted for inflation, and the effects of inflation over the years are proportionally offset. So this increase in the ratio is another way of looking at the plight of consumers in this pandemic economy.
The credit card phenomenon.
Revolving Consumer Credit is made up of credit card debt and other revolving credits such as personal loans. Credit card debt itself – a record the New York Fed provided in its household credit report – fell by $ 82 billion to $ 820 billion in the second quarter.
Credit card debt usually goes down in the First quarterwhile consumers try to overcome the hangover from shopping on vacation. But the only time it declined in the second quarter was during and after the great recession when consumers were forced to save seriously: in 2009, 2010 and 2012 and only between 1% and 2.4%. But in the second quarter of 2020, credit card debt dropped 9%! A decline of this magnitude has never occurred any Quarter to 2000:
Within the first quarter, the sharpest declines were recorded in April and May and continued to a lesser extent in June.
But everything other The household credit categories combined – mortgages, HELOCs, auto loans, student loans, and other loans – rose almost as much as credit card balances.
In addition, new criminal credit card balances fell – that’s the opposite of what you would expect them to do during an unprecedented unemployment shock.
During the Great Recession, when people who had lost their jobs fell behind on their credit cards, new criminal balances rose to nearly 14%. This wasn’t just subprime, it was all credits together! Then, during and after the Great Recession, as lenders and consumers went through a painful cleansing process, new criminal balances declined, eventually hitting a two-decade low in early 2016. Then they rose again during the good times when the subprime segment started having problems funding those good times. But in the second quarter came the pandemic economy and suddenly new criminal balances dropped up to 6.2%:
Why have credit card balances decreased and new criminal balances decreased?
Virtually all consumers below a certain income level received the stimulus payments, and most people who had lost their jobs received regular unemployment benefits or the new federal unemployment benefit plus an additional $ 600 per week. Regular unemployment benefits are difficult to come by. But with the extra $ 600 a week, many people were getting more unemployment benefits than they were making at work.
“Two-thirds of UI-eligible employees can receive benefits in excess of the loss of earnings, and one fifth can receive benefits that are at least twice the loss of earnings,” according to a study by the Becker Friedman Institute for Economics at the University of Chicago .
Combine that with the numerous studies that show that roughly half of households don’t have enough cash in their savings accounts for a relatively minor emergency like $ 500.
And it turns out that many people serve their cash flow needs like companies do: from revolving credit lines.
For consumers using credit cards, almost all payments are processed except for residential property payments. And people who don’t pay out the balances every month end up paying dizzying interest on those outstanding balances. When these consumers receive cash, such as. For example, stimulus checks or the extra $ 600 a week they use to pay off their credit cards, which reduces their interest costs, instead of putting them in a savings account that doesn’t make any money. This is a smart thing to do.
Most of the stimulus payments arrived in April and May, adding to the collapse in credit card balances during those months. And later, when consumers buy something, they bring their credit cards back up.
Some consumers used the stimulus money this way to catch up on the credit card payments they had fallen back to, and other consumers didn’t lag behind on their credit card payments because of the stimulus money, which would explain part of the drop in new criminal balances.
Another pandemic trend is for credit card companies to offer deferral programs for credit card holders when they get into trouble. Under these deferral programs, payments are put on hold and the credit card loan is considered “current” even though no payments are made until the end of the deferral period. This also lowers the rate of newly criminal credit card balances.
And lending standards are tightening.
Banks, fearful of major turmoil in consumer credit and anticipating major losses on their consumer credit, have lowered credit limits and / or closed cards from consumers who for some reason are flagged by algae.
In the two months to mid-July, another 66 million people had canceled at least one credit card and / or reduced the credit limit after 50 million people had canceled a credit card and / or reduced the credit limit to CompareCards in the previous month. Most people have more than one credit card, but that is still a major tightening of credit availability.
The report notes that the promotions were spread across the spectrum, but some were more affected than others: for example, in terms of age group, millennials were most likely to say a credit card was canceled and / or the credit limit lowered. In terms of income category, people with the highest income were most likely to have reported one or both of these measures.
Closing cards and lowering the credit limit does not reduce the balance on the card on site, but prevents these cardholders from increasing their balance on these cards.
This paints a complex picture of stimulus payments and the additional $ 600 a week that goes not just into consumer spending but into credit card balances as banks reduce their risk of potentially problematic credit card debt and allow already problematic cardholders to defer payments avoid having to post payment arrears.
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