Despite COVID, credit card debt sinks to lowest level since 2017

During the pandemic-created recession, when millions of Americans are strapped for cash, you’d think that more of us would turn to credit cards to help tide us over. It appears that just the opposite has happened, though.

Before 2020, consumer credit card debt grew for eight consecutive years, hitting a record high of $829 million in 2019, according to new data from Experian. But in the past year, that tally fell by 9 percent. Now, outstanding credit card debt in the U.S. totals $756 billion. That’s the lowest dollar amount since 2017, Experian says.

Credit utilization and late payments also fell

At the same time, two key measures of credit card activity—credit utilization and late payments—have both moved downward, Experian says. For its analysis, Experian compared credit card data from the third quarter of 2020 with data from previous years.

“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,” said Rod Griffin, senior director of consumer education and advocacy at Experian.

A lower credit utilization ratio and lower number of late payments can boost your credit score. Both demonstrate responsible use of credit. Your payment history, including delinquencies, makes up 35 percent of the widely used FICO credit score. Your credit utilization ratio (the share of available credit that you’ve borrowed) constitutes 30 percent of your FICO score.

Average card balance drops for first time in eight years

Experian’s data shows the average credit card balance for U.S. consumers has fallen by $879 since 2019. That’s a 14 percent decrease. It’s the first time since 2011 that average credit card debt for American consumers shrank compared with the previous year, Experian says.

“The expectation that consumers would rely more heavily on revolving debt during an economic crisis is not far-fetched. But reality shows that three-quarters of the way through 2020, U.S. credit card debt is at the lowest it’s been for quite some time,” Experian noted.

Experian suggests at least part of the decline in credit card debt can be attributed to consumers’ access to cash and debt relief through the Coronavirus Aid, Relief and Economic Security (CARES) Act. Provisions in the CARES Act, such as suspension of student loan payments and a one-time stimulus check of up to $1,200, “may have given consumers the wiggle room necessary to pay down their balances,” Experian said.

Experian’s data aligns with numbers recently released by the Federal Reserve Bank of New York. In the third quarter of this year, credit card balances in the U.S. fell by $10 billion, following a $76 billion drop in the previous quarter. The second-quarter decrease was the biggest since the bank began tracking such data in 1999.

“The decline in card balances reflects continued weak consumer spending amid the COVID-19 pandemic, as well as households paying down existing credit card debt,” the Fed said.

A decline in delinquencies

In another uplifting sign reported by Experian, the percentage of credit accounts overdue by anywhere from 30 days to 180 days has tapered off.

From 2019 to 2020, the share of credit card accounts 30 to 59 days past due plummeted 33 percent, with the share of accounts at the 60- to 89-day overdue mark registering a 31 percent decline and the share of accounts at the 90- to 180-day stage decreasing 24 percent.

Will consumers’ financial strength endure?

Experian cautions that all of this positive data represents merely a snapshot of credit card activity during a turbulent period. While evidence of consumers’ success in handling credit card debt stands out against a “difficult economic backdrop,” the question remains whether that financial strength will extend into 2021, Experian says.