It’s becoming increasingly clear that one effect of the coronavirus (COVID-19) pandemic has been a change in consumers’ financial habits. A new study of consumers’ credit card debt shows the biggest reduction on record as the pandemic shut down the economy.
In its latest credit card debt study, WalletHub reports that Americans began the year owing more than $1 trillion in credit card debt after a $76.7 billion spending spree during 2019. But when the pandemic arrived with full force in March, consumers’ first impulse was to pay off debt. Credit card balances dropped by a record $60 billion.
The frugality continued in the second quarter. Not only did consumers put less on plastic in April through June, they paid off another $58 billion -- a record paydown for the second quarter.
‘Generous unemployment benefits’ helped
When 2020 draws to a close, WalletHub researchers predict that consumers will end the year with less credit card debt than when they began, the first time that’s happened since the end of the Great Recession in 2009.
“The fact that U.S. consumers paid off $58.1 billion in credit card debt during the second quarter of 2020 is largely attributable to the generous unemployment benefits that laid-off workers were still receiving at the time by Congressional decree, as well as the overall efforts people have made to cut back on spending and generally de-risk their finances in the face of historic uncertainty,” said Jill Gonzalez, WalletHub analyst.
“It might seem counterintuitive that debt levels would decline when so many people are out of work, but that’s also when people become most frugal and when credit card issuers get stingier with approval decisions and credit limits.”
A Gallup study released this week tends to back up the conclusion that consumers have become more careful with their spending during the pandemic. The survey -- taken after the personal benefits from the CARES Act expired -- shows that 54 percent of Americans are currently saving at least some of their money and plan to continue saving versus spending what they have in the near future.
In another encouraging sign, 76 percent of the people with the ability to save money plan to keep socking it away over the next six months. Another 28 percent say they’ll spend their money on basic goods and services; only 13 percent will splurge a bit on vacation or travel; and 10 percent will use their savings to pay off debts, such as credit cards.
And while day trading in the stock market has become more popular since the pandemic, it apparently involves only a small subset of investors. Seventy-nine percent of the respondents in the Gallup study said they prefer to tuck money away in a savings account, keeping it in cash.