Federal Reserve Reports Total Household Debt Declining

The COVID-19 pandemic has led to a lot of economic uncertainty. Between the shutdowns and job layoffs, coupled with the fact no one really knows what will happen with the virus this fall and winter, it’s difficult to predict what things will look like in over the next few months. That being said, according to the New York Federal Reserve, total household debt has declined for the first time since 2014.

COVID-19 affects consumer spending

The New York Fed reported in August total household debt dropped by $34 billion (0.2 percent) to $14.27 trillion in the second quarter. The agency reports the last decline of this type occurred in 2014 and the current decrease of debt is the largest fall since 2013. Economists suggest this drop of overall debt is directly tied to the pandemic, due to less overall spending and social distancing requirements.

Credit card debt sees a major decline

While mortgage debt and home equity loans are on the rise, credit card debt is on a significant decline. According to the Fed, mortgage debt rose by $63 million to $9.78 trillion but credit card debt has fallen by a whopping $76 billion. The Fed says this is “the steepest decline in the history of the data.” Even the number of newly delinquent credit account balances fell to 6.2%, according to WolfStreet.

Consumers actively pay debt during the pandemic

A sharp decrease in credit card debt seems unusual due to the high unemployment rates brought on by the pandemic. As a comparison, during the Great Recession’s height of unemployment, the exact opposite occurred. The current trend is attributed to the extra money received by the CARES Act. Instead of spending or saving money (not benefiting from low-interest rates), people have used it to pay down high-interest credit balances.

Joelle Scally, Administrator of the Center for Microeconomic Data at the New York Fed, states the CARES Act “prevented large-scale delinquency” and helped consumers avoid damaging their credit standing and future access to credit. Scally does warn the benefits given by the CARES Act may be masking “the very real financial challenges that Americans may be experiencing” due to the pandemic.

Now’s a good time to establish a healthy credit score

The Fed says it is too soon to tell if the overall consumer reduced debt volume that has occurred during COVID-19 will continue once the pandemic is over. However, even if it doesn’t, consumers can still individually strive to pull themselves out of debt and establish a good credit score.

PRBC is dedicated to helping consumers establish an alternative credit score. These scores are widely accepted by credit issuers and lenders. All you have to do is continue paying your everyday expenses, such as utility and other routine bills, and you can grow a strong credit reputation. If you’d like to learn more about our alternative scoring process or have any other questions, contact us today.