The World Sees a Retraction Of Credit Card Debt


Demand for new borrowing in the form of credit cards, personal loans and even pawnshops, is down sharply amidst pandemic

Credit-card debt in the U.S. and other advanced economies has fallen and reports say fewer people are late on their payments. According to economists and financial executives this is a result of the large government stimulus programs launched in the U.S. and other advanced economies that have worked very well.

“We’re not seeing consumers increase credit-card balances; in fact, they’re continuing to pay down balances,” said Peter Maynard, senior vice president at Equifax, the credit-reporting firm that tracks consumer borrowing in the U.S., Canada, the U.K. and other countries. “They’re using the injection of government stimulus, quite frankly, to put themselves in a better position.”

Canada and the U.K. are extending and tweaking their stimulus programs. European Union leaders agreed on a €1.8 trillion ($2.06 trillion) spending package, and now will add details regarding how to distribute that money in their economies in the months and years to come.

In the United States nearly 18 million Americans are unemployed. Economists and finance executives say.

“The cardholder base, given the level of economic distress, has held up remarkably well,” said Discover Financial Services Chief Executive Roger Hochschild. “Without a doubt, government help is helping people meet their obligations… If it’s not renewed, it will drive down the whole economy.”

In the U.S., total outstanding credit-card debt fell by 11%, or $100 billion, between February and the end of June, according to Equifax. April was the largest monthly drop in credit on record, while May was the second-largest. Even personal-loan originations were down by a third in mid-May compared with the beginning of March, according to Equifax.

Abroad, credit-card debt is down 11% in Canada, 14% in the U.K. and 17% in Australia. In the eurozone, credit-card debt and other forms of revolving credit for households fell 5% between February and June.

Large credit-card issuers such as Capital One Financial Corp. and Synchrony Financial said many of their customers who entered deferment programs in the spring had exited by June.

This time it is different than the 2008 recessions. Back then delinquencies rose when the unemployment rate increased. This time, the number of credit-card accounts in the U.S. that are late on payments has fallen by more than a third, according to Equifax.

“Stimulus money goes into the bank account, and debit is the access vehicle for spending,” says Tony Hayes, who leads the payments industry division at the consulting firm Oliver Wyman.

U.S. government stimulus has delivered a boost worth more than 9% of the GDP, according to economists at Brussels-based economic think tank Bruegel. That includes $1,200 checks sent to eligible adults, the extra $600 in weekly unemployment benefits, and $500 for dependent children.

The combination of state and federal unemployment benefits translates into 2/3 of U.S. workers who were laid off or furloughed being eligible to receive more in unemployment than they were earning on the job, according to a study by economists at the University of Chicago. The U.S. stimulus legislation also allowed people to defer payments on their federally backed mortgages for up to a year and most federal student loans through September. This means many Americans who were living for years with large credit-card balances had a chance to pay them down.

Lenders of all stripes were expecting people to borrow more when lockdowns began.

“But exactly the opposite happened,” said Stephan Goebel, who runs a chain of pawnshops in the working-class neighborhoods of Berlin. “People came in and retrieved their jewels, gold watches and other valuables.”

U.S. pawnshops, which typically serve consumers with low or no credit scores, report that lending activity has fallen sharply, largely because of federal stimulus payments. Pawnshop borrowers have become buyers: Pawnshop sales of electronic equipment and other goods needed during lockdowns have surged.

“The federal government was quick to provide liquidity to people in our customer group,” says David Ashe, who runs La Familia, a chain of 41 pawnshops in Florida and Puerto Rico.

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Economics, Finance and Investing