In the second quarter (Q2) of this year, household debt in the United States declined for the first time in nearly six years. After 23 quarters of continuous growth, total consumer debt dropped by about $34 billion in Q2 2020.
Much of the net decrease was attributable to the largest drop in outstanding credit card debt since the Federal Reserve Bank of New York began publishing its Quarterly Report on Household Debt and Credit. Delinquencies also declined in Q2. But, these slight improvements appear to have been more of a blip than the start of a trend.
In Q3, outstanding household debt increased by $87 billion, more than offsetting the Q2 declines and reaching a new high: $14.35 trillion.
Why Did Consumer Debt Drop in Q2?
Your first instinct probably isn’t to think that a worldwide pandemic triggered the decline in household debt. But, the actions both governmental entities and private businesses took in response to the pandemic likely played a significant role.
- Delinquencies for some types of debt dropped as a result of government moratoriums and other actions, such as the temporary suspension of student loan payments.
- Mortgage delinquencies declined as servicers placed accounts in deferred status or forbearance, either in response to legal mandates or through voluntary programs
- Many other creditors, such as credit card companies and personal loan companies, created deferral programs that took accounts out of delinquent status or stopped them from going further into delinquency
At the same time, short-term income replacement efforts left some consumers better off than they’d been before the pandemic, allowing them to catch up past-due balances or pay down debt. For instance:
- Many Americans received stimulus checks in early 2020, including millions whose income had not changed due to the pandemic
- The federal boost to unemployment benefits meant that for a few months, many people who had lost their jobs were receiving more weekly income than they had while employed
- The halt in student loan payments, moratoriums on evictions and similar measures allowed many consumers to allocate their money differently
Of course, the impact of the stimulus checks on consumers varied depending on their financial circumstances. For example, the added $600/week in unemployment benefits was especially significant in states like Mississippi (where the maximum weekly benefit is $235) and Alabama (where the maximum weekly benefit is $275).
In Mississippi, for instance, a person normally earning $500/week and qualified for $235/week in regular unemployment benefits would have received $835/week with the federal enhancement. That’s about $1440/month more than the recipient’s regular earned income–an increase of about 67%.
In the short term, these supports left many people with more flexibility to pay debt, less reliance on credit, and better cash flow than before the crisis. But, the crisis continued, and the relief didn’t.
Increasing Household Debt Makes a Comeback
The loss of enhanced unemployment benefits, the one-time nature of the federal stimulus checks and the end of deferrals and moratoriums undoubtedly played a role in the return to the normal consumer debt trend. But, those aren’t the only factors.
The Q3 Household Debt and Credit Report described new extensions of credit as “robust.” That’s a shift from earlier in the year. But, those new originations are focused in two areas, both secured: mortgage loans/refinances and automobile loans. And, average credit scores for new mortgage loans and auto loans both increased, to 786 and 712 respectively. In other words, while new extensions of credit are increasing, that trend doesn’t signal improved access to credit for those who may already have been struggling.
Tightening continued in two other areas. Credit limits on home equity lines of credit (HELOCs) shrunk by $16 billion, after remaining relatively stable in Q2. And, aggregate credit card limits declined by $31 billion, on the heels of a $53 billion drop during Q2. The distinction is significant, because HELOCs and credit cards are two of the types of credit people often rely on to bridge them over a gap in income or manage an unexpected expense. With unemployment rates still running high, many people have found their usual safety nets limited or eliminated.
Delinquencies Continue to Decline
Though the amount of outstanding debt is on the rise again, delinquencies continued to decline in Q3.
Transitions into new delinquency status are down across the board, in student loans, automobile loans, credit cards, mortgage loans and HELOCs. The same is true for transitions into serious delinquency (90+ days past due). In both categories, the decline is most dramatic for student loan debt, much of which remains in special status due to the pandemic.
New foreclosures are at the lowest point in the 17-year history included in the report, as are new bankruptcy filings. And, the percentage of consumers with debt in collections has declined steadily this year. But, like the Q2 drop in total household debt, much of this apparent good news is likely to be short-lived, unless we see another round of assistance or extended protections for consumers whose financial lives were derailed by the pandemic.
Explore Long-Term Financial Solutions
Stimulus checks, increased unemployment benefits, eviction moratoriums, paused student loans and other Covid-19 relief measures have one important thing in common: they’re temporary. While that short-term relief may have been sufficient to keep some families stable until workplaces reopened or new jobs opened up, many are still unemployed. Even those who may have returned to work or found new employment may have fallen far enough behind that catching up seems impossible–especially if the threat of eviction, foreclosure, or repossession is looming.
If you’re in that situation, the best gift you can give yourself is accurate information about your rights and options. At Bond & Botes, we understand how stressful this time is, and how important it is that you know how best to protect yourself. We offer free consultations to people struggling with debt in Alabama, Mississippi, and Tennessee.
For your safety, we are currently offering consultations and full-service representation via phone and video, so you never have to leave home. Just call 877-581-3396 or fill out the contact form on this page to get started.
Cynthia T. Lawson is the Managing Partner of the Bond & Botes Law Offices location in Knoxville, Tennessee. She holds a Bachelor of Science from East Tennessee State University, and a Juris Doctorate from University of Memphis, Cecil C. Humphreys School of Law. She currently serves as a Mentor for the Moment in bankruptcy.Read her full bio here.