How the COVID-19 Pandemic Led to a Surprising Initial Reduction in Credit Card Debt

Covid 19 And Decreasing Credit Card Debt
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Matt Walker
By: Matt Walker
Posted: October 8, 2020
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In a Nutshell: The COVID-19 pandemic has left consumers uncertain about a lot of things — and chief among them is their future economic stability. Yet, rather than depending on credit to get by, in the first half of the year consumers paid down a record amount of credit card debt. We spoke with Beth Horowitz Steel, a Partner at Glenbrook Partners, to discuss this interesting development as well as other current trends within the financial world. This includes credit card issuers stepping up their rewards programs, waiving fees, and deferring payments. Additionally, fintech-based companies like challenger banks and alternative lenders have continued to do well through the pandemic where some traditional financial institutions have faltered.

As soon as schools, restaurants, and other businesses across the country began closing their doors in March due to the COVID-19 pandemic, it was immediately clear there would be economic repercussions. But how extensive those repercussions would be and what they would look like were yet to be determined.

In some cases, they still are.

Person Holding a Credit Card

The first half of 2020 saw a record amount of credit card debt being paid down.

Unprecedented numbers of U.S. residents have filed for employment in recent months, yet the stock market has remained strong. Locally owned restaurants have struggled, and some have closed forever. Meanwhile, American billionaires have increased their fortunes substantially since the onset of COVID-19.

With people across the country grappling with unemployment, reductions in income, or with the uncertainty of the economy, in general, one might assume credit card debt would skyrocket.

But that wasn’t the case.

Instead, consumers paid down $118 billion in credit card debt during the first half of 2020, setting a record for the largest paydown in history.

To learn more about this somewhat surprising news, and other economic trends spurred on by the pandemic, we recently spoke with Beth Horowitz Steel, a Partner at Glenbrook Partners. Glenbrook is an independent payments industry strategy consulting and research firm that operates on the front lines of the industry.

Consumers Tend to Rely on Debit Cards for Everyday Goods and Services

While everybody’s financial situation and spending habits are unique, Steel pointed out certain trends that help explain the recent reduction in credit card debt.

“If you think about where people spend credit in general and where they spend using debit, credit is much more in entertainment, travel — the places that got shut down,” she explained. “Whereas, debit is huge in supermarkets and in everyday spend categories.”

Looking at spending through this lens, she said it’s not surprising to see that people were relying on the money they actually had in their bank accounts during the early days of COVID. Certain categories of spending simply have some natural consumer preferences.

Beth Horowitz Steel

Beth Horowitz Steel is a Partner at Glenbrook Partners.

“I do think there’s a lot to be said with the categories of spend — travel and entertainment got hit tremendously because of the high level of credit usage they see,” Steel said.

Another possible contributing factor may be that some consumers were able to use relief funds to help pay down their debts, or use them to build up savings.

“News reports stated that some people were getting their money from the PPP and putting it into their savings accounts for a rainy day,” Steel said.

Steel also discussed how the current economic challenges contrast with the Great Recession in 2008.

“In the last recession, credit risk was inverse to job loss. You could track credit losses at credit card companies as an inverse to unemployment,” she said.

Steel said today’s economic downturn currently looks different because it is correlated with those particular areas mentioned above that were essentially shut down very quickly.

She said that while the reliance on debit spending has been increasing over the past decade, she suspects that in the long run credit card usage will return to pre-COVID levels.

Credit Card Issuers Boost Bonuses and Offer Relief in Response to the Coronavirus

As the relationship many consumers have to credit has changed during the COVID-19 pandemic, credit card issuers have also made changes as a result of these challenging times.

Steel said she has received notices from credit card companies to let her know she has relief options if she is having trouble paying.

Glenbrook Logo

Glenbrook Partners is an independent payments industry strategy consulting and research firm.

“There are multiple examples of issuers reaching out to their customers. I think they’ve learned from those that were around in the last recession,” she said. “And there’s this ‘everyone’s in this together’ type of mentality. Those are the financial institutions that are actually going to not only win the money of people but the hearts and minds as well.”

People will remember when a brand helped them through rough times, Steel said.

Prominent issuers, including American Express, Bank of America, Chase, and Wells Fargo, have all implemented initiatives to help consumers by either waiving certain fees or deferring payments.

These issuers, and others, have always boosted their rewards programs in various ways to encourage consumers to continue relying on the cards.

For example, Discover announced that holders of the Discover it® Miles card will be able to use their miles as a statement credit toward travel, restaurant, and gas station purchases. Similarly, Capital One announced more flexible miles redemption for a limited time and bonus rewards through services including Netflix, Hulu, and Uber Eats.

Challenger Banks and Alternative Lenders are Benefiting from Recent Trends

Steel also noted how, in the midst of some traditional financial institutions struggling to navigate the impact of the pandemic, many finance newcomers continue to thrive.

“It’s really an interesting situation, which is why I think you can look to some of the challenger banks and the alternative lenders, and they’re having tremendous success,” she said.

For those who may not be familiar with these terms, challenger banks are generally small-to-medium sized financial institutions often built on the latest fintech. As the term implies, they frequently challenge the large, long-standing institutions by offering consumers more modern and innovative ways to handle their finances.

Similarly, alternative lenders thwart the traditional financial institution model by relying heavily on fintech and adopting a more consumer-focused approach. Funding Circle and Quicken Loans are among the most notable names in this camp.

Other companies sidestepping the role of the traditional financial institution include companies like Venmo and PayPal, which allow fast and easy digital transfer of funds.

“If you feel like you’re not getting as much from your bank or from your credit card provider, there are options. If a company such as Chime is going to give you bank-like products, and they are going to give you an advance on the PPP, you’re going to start liking them. You’re going to start feeling some loyalty towards them.” — Beth Horowitz Steel

Steel also points to how far fintech-based financial companies have come over the years.

“We didn’t have the installment loan products that we have today, or the alternative short-term lending options that we do today,” she said. “The 20-year-old demographic have balances in Venmo and PayPal. And look at the success of the Square app — 24 million active users with over $1 billion in deposits — a level that benefitted from PPP direct deposits.”

The COVID-19 pandemic hit the world of finance during a transitional era, where traditional institutions and modern fintech-based companies are vying for consumer business. Meanwhile, consumers have tightened their belts in some ways in the face of financial uncertainty. Hopefully, in the end, the economy will bounce back and the options available to consumers will remain in their favor.