Talk about encouraging — and surprising — news.
Millions of Americans are struggling with income loss during the COVID-19 pandemic, so you’d think credit card balances would skyrocket at a time like this. But actually, the opposite has happened. Total household debt decreased during 2020’s second quarter, and credit card balances declined by $76 billion, according to the Federal Reserve Bank of New York. That’s the steepest decline in credit card balances in the history of this data.
Americans are pulling back on spending
A lot of people are earning less or grappling with financial insecurity during the pandemic, and clearly, that’s influenced spending. Lower credit card balances reflect that consumers are less quick to part with money, and are perhaps using more discretion when making purchases.
Interestingly, credit cards also had lower delinquency rates last quarter. Again, we can thank the pandemic for that. A lot of credit card issuers are offering relief during the ongoing crisis, making it easier for consumers to avoid delinquencies. There’s also relief in the form of mortgage forbearance, so homeowners who’ve hit pause on housing payments may instead be diverting cash to pay their credit card minimums.
What does your credit card balance look like today?
While it’s encouraging that credit card balances mostly declined this past quarter, that doesn’t mean it holds true for everyone. If your balance has increased during the pandemic, it may be time to rethink your spending.
It pays to set up a budget based on your current income. If you’re unemployed, take the income you’re getting in benefits plus whatever severance pay you’re entitled to, and that will tell you where to cap your spending, if you can. If you’re working, use your take-home pay as a starting point. From there, group your expenses into necessities versus luxuries, and prepare to pare down in the latter category if your spending exceeds your income. There’s no getting around buying groceries and medication, but if you rack up a credit card balance paying for takeout meals and subscription boxes for beauty products, those are probably worth skipping.
Of course, some people have cut spending to a bare minimum and are still struggling in the ongoing economic crisis. If you’re forced to use your credit card as a lifeline right now, make sure you continue your minimum monthly payments. If you can’t do that, ask for relief. You may be able to defer some payments, so reach out to your card issuers rather than falling delinquent. If you skip out on minimum payments, your credit score could get severely damaged, making it more difficult for you to borrow money when you need to.
Finally, if you’re carrying credit card debt but aren’t hurting financially, pay down your balance. Maybe you’re not going out much or aren’t commuting to work because of the pandemic. That gives you a chance to chip away at what you owe so you can join the people whose credit card balances are getting smaller.