The Overall Amount of Credit Card Debt in the U.S. Is Falling

• Author: Bryan Miller
• Posted: 2024-07-31

In the midst of a pandemic with the unemployment rate soaring, you would think that Americans would be leaning more on their credit cards as a way of keeping their heads above water financially. Sometimes, credit cards are the last resort in tough economic times. Nonetheless, there are instances in which it makes sense to use credit cards as an alternative to a worse choice.

The good news is that Americans are actually cutting their credit card during the pandemic. This is an encouraging sign for a country that was awash in credit card debt, even as a robust economy lifted wages. The amount of decline is not even negligible as Americans have chopped a significant amount off of their balances. Whether this is a permanent change in behavior due to the pandemic or a momentary change based on circumstances remains to be seen. Nonetheless, it is an encouraging sign that COVID-19 may not bring on the expected wave of bankruptcies that come with every deep recession.

Total Credit Card Debt Has Dropped Below $1 Trillion

First, a brief look at the numbers shows exactly how Americans have responded to COVID-19. The overall amount of credit card debt has fallen by more than 10%. For the first time since 2016, the total credit debt in the U.S. is below $1 trillion. In May alone, the amount of credit card debt fell by over $24 billion.

COVID-19 seems to be a different kind of recession than all of the other previous recessions. While the pandemic has had devastating economic effects, one of the benefits for Americans financially is that their expenses have gone done. When Americans were at home for the lockdown, they were not having to pay for gasoline or car maintenance costs. Moreover, their spending on entertainment practically dried up as there was none available. In addition, many Americans have cancelled their summer vacations, saving themselves thousands of dollars. In summary, the lockdowns have reduced people's spending on the necessities, meaning they can devote more money to paying off their debt.

In addition, many people seem to have heeded the experts' advice and put some of their stimulus payment towards reducing their credit card debt. The hope for the stimulus was that people would go out and spend it, but the more sensible thing was to use to pay off debt that carries a high interest rate. Families with two children received over $3,000. Those who were able to keep their jobs had little to spend it on so they decided to reduce their debt. This was a smart decision which makes it easier for households as the economic recession continues.

The Country As a Whole Started Saving More When the Pandemic Hit

Many Americans immediately decided when COVID-19 hit that they would move to increase their savings. In fact, the savings rate surged by the highest rate ever, even as people were losing jobs and having their income cut. The prevailing thought was that everyone realized that the next call they got was the one telling them that they lost their job. Almost at once, the entire country cut or eliminated unnecessary spending. While this was devastating for the economy, it certainly helped each household's bottom line.

However, we will soon find out if this is a temporary respite that came as a result of waves of government money washing over the economy or whether it was from a real change in behavior. When expanded unemployment benefits run out at the end of July, those who are still out of work will begin to struggle. There may be very few options for them other than credit card debt if they simply do not have enough money for the necessities. There are other government programs that will begin running out of money soon, but the economy is still a long way from full recovery.

The good news is that the drop in overall indentedness at least gives Americans more room to charge on their credit cards if the rough times continue. People who have cut their balances can borrow more if they are stuck. However, increasing credit card debt should not be their preferred option to deal with shortfalls each month. Even if the drop in overall credit debt is not the result of more savings and better financial habits, it will still have positive effects as the economy loses government stimulus.