December 03, 2021
Robert M. Adams, Vitaly M. Bord, and Bradley Katcher
Consumer acclaim agenda balances in the United States accomplished aberrant declines during the COVID-19 pandemic. According to the G.19 Customer Acclaim statistical release, revolving customer acclaim fell added than $120 billion (11 percent) in 2020, the better abatement in both nominal and allotment agreement in the history of the series. Revolving customer acclaim fell an added $28 billion (almost 3 percent) amidst December 2020 and April 2021, afore alpha to recover.
In this Note, we appraise the aloft drivers of this abatement in balances application account-level data. Afterward up on our antecedent Note, “The Furnishings of the COVID-19 Shutdown on Customer Acclaim Markets: Revolvers against Transactors,” we appearance that best of the antecedent abatement in acclaim agenda balances in mid-2020 was primarily due to a abatement in acquirement volume. Subsequently, as spending on acclaim cards rebounded, three added factors came into play: college paydowns of revolving balances; increases in the allotment of purchases that are paid bottomward above-mentioned to account abutting (and are not reflected in balances); and changes in the arising and acceptance of new cards.
We acquisition that both paydowns and prepayments rose acutely to historically aerial levels by April 2021, and we additionally present affirmation constant with bang programs active some of the college paydowns. These college paydowns abject advance in acclaim agenda balances through April, afore subsiding somewhat as the bang payments waned. In addition, changes in both the cardinal and acceptance of new cards originated back the alpha of the communicable contributed to abatement in balances, answer about 20 percent of the abatement in 2020 and 13 percent of the abatement in the aboriginal four months of 2021.
Throughout this note, we use account-level acclaim agenda abstracts from the Capital Assessments and Accent Testing Report (FR Y-14M). The Y-14M abstracts accommodate advice on all acclaim agenda accounts for the better cyberbanking organizations (that is, those complex with accent testing). For added advice on our dataset, amuse see Adams and Bord (2020).
We activate our assay by analytical the apparatus of acclaim agenda balances during the COVID-19 pandemic.
Figure 1 shows the absolute acclaim agenda balances, afar into its 3 capital components: revolving balances—defined as the antecedent account antithesis bare payments; net acquirement volume, authentic as acquirement accumulated bare any aboriginal payments that pay bottomward these purchases above-mentioned to account close, and added accuse such as antithesis transfers. After falling from a aerial of about $625 billion in January 2020 to beneath than $550 billion in December 2020, absolute balances alone added to about $500 billion by April 2021 afore convalescent to $520 billion by July 2021.
As discussed in Adams and Bord (2020), the antecedent date of the abatement in balances was mainly apprenticed by the abatement in acclaim agenda purchases. Net acquirement accumulated fell from $151 billion in January 2020 to a low of beneath than 100 billion in April afore airy slowly.1 By January 2021, net acquirement accumulated stood at $135 billion, about 10 percent beneath January 2020 levels. This apathetic backlash in acquirement accumulated concluded in April 2021, as acclaim agenda spending took off amidst boundless vaccinations and the accepted aperture of the economy.2 Net acquirement accumulated rose from $140 billion in March 2021 to $170 billion by July.3
Although the bead in acclaim agenda purchases explains the abatement in balances in the aboriginal months of the pandemic, balances connected to abatement through best of 2020, alike as acquirement accumulated boring recovered. This abatement in balances occurred as revolving balances—that is, balances that borrowers backpack on their accounts for a abiding aeon which may accumulate absorption charges—fell from about $460 billion in January 2020 to $348 billion by April 2021, afore inching up to $352 billion by July. We abutting appraise how changes in customer acquittal behavior collection this abatement in revolving balances.
We analyze two channels through which payments bargain balances: paydowns of absolute revolving balances and pre-payment of purchases afore a account closes so they are never reflected in account cycle-end balances.
3.1 PaydownsThe aboriginal approach focuses on declines acquired by consumers advantageous off their revolving balances. As Figure 2 shows, payments in antithesis of the minimum due as a atom of the antecedent account antithesis (in blue) accomplished actual highs of about 15 percent in aboriginal 2021, up from about 12 above-mentioned to the pandemic.4
We abutting appraise the role of the bang payments in these college paydowns. Figure 3 decomposes payments into those fabricated by accounts acceptable for the bang checks in 2020 and 2021 (in blue) and those disqualified (in orange).5 After ability alone baby changes in payments aboriginal in the pandemic, borrowers acceptable for the bang added their paydowns about at the alpha of 2021, acceptable accurate by the additional and third circuit of stimulus.6 Indeed, the ample surges in paydowns amid borrowers acceptable for the bang action in January and March, at about the aforementioned time as the additional and third stimulus.7 Constant with this, paydowns by borrowers acceptable for the bang alone acutely in May 2021, afore convalescent somewhat over the afterward months.8
That said, borrowers disqualified for bang checks additionally paid bottomward balances at analogously aerial or alike college ante during this time. Acclaim agenda users disqualified for the bang may be application added sources of assets and abundance to pay bottomward acclaim agenda balances. Higher-income consumers are added acceptable to own stocks or a abode and back both the banal bazaar and apartment markets accomplished cogent assets during the pandemic, these college payments by stimulus-ineligible borrowers in the winter and bounce of 2021 may reflect a abundance aftereffect arising from increases in the ethics of these assets. In addition, higher-income households accomplished a beyond acceleration in antithesis savings, stemming in allotment from a accumulative abatement in burning (Batty, Deeken and Volz, 2021). This access in antithesis accumulation additionally may accept led to college debt paydowns. Finally, besides bang payments and the abeyant abundance effects, consumers additionally could accept afflicted their consumption, saving, and acclaim agenda acquittal behavior during the pandemic.9
The additional approach through which balances abatement focuses on the college prevalence of prepayments. A accommodation occurs back a borrower makes a acquittal appear purchases above-mentioned to the account closing. For example, sometimes borrowers pay for ample acclaim agenda purchases afore they accept their statements.10 Another archetype occurs back transacting users pay added than the account balance, finer advantageous bottomward new purchases amidst account closing date and the acquittal due date.11 As the allotment of transactors—that is, accounts that do not circumduct a balance—increases, the allotment of accounts authoritative aboriginal payments additionally tends to rise.
Since April 2020, the allotment of accounts with revolving balances fell sharply, aboriginal due to the declines in spending during the aboriginal genitalia of the communicable and again due to the about college payments discussed earlier. Indeed, as Figure 4 shows, the allotment of accounts that circumduct a balance, in orange, beneath from about 40 percent in aboriginal 2020 to a actual low of 33 percent by April 2021, afore alpha to antithesis somewhat in the afterward months. Similarly, the allotment of accounts that accomplish aboriginal payments, in blue, added from 19 to about 26 percent by April 2021, again beneath to 24 percent by July.12
Importantly, increases in the allotment of prepayments about beggarly that a college allotment of acclaim agenda spending is not reflected in acclaim agenda balances. Therefore, increases in the allotment of acquirement accumulated that is prepaid account acclaim agenda antithesis advance to be understated.
In all, the access in prepayments has had a cogent appulse on the advance of acclaim agenda balances. As Figure 2 shows, the allotment of acquirement accumulated that is prepaid added from about 17 percent above-mentioned to the communicable to about 20 percent by the additional bisected of 2020 and 22 percent by April of 2021. If these increases had not taken place, revolving acclaim advance would accept been abundant higher. For example, if the allotment of acquirement accumulated prepaid had remained at 17 percent, acclaim agenda antithesis advance would accept been college by added than 1 allotment point in February 2021 and by about 2 allotment credibility in April 2021.13
Another disciplinarian of the abatement in balances is the aberration in trends amidst acclaim cards originated above-mentioned to and during the pandemic. New acclaim agenda originations plummeted in the additional division of 2020, afore alpha a apathetic backlash in the additional bisected of 2020 (Figure 5). This backlash adequate in the 2nd quarter of 2021, with arising at or aloft pre-pandemic levels in all acclaim account categories by June.
In accession to the all-encompassing allowance of originations, the accelerated allowance of how borrowers use new cards additionally charcoal depressed.14 Boilerplate antithesis alteration accumulated and boilerplate purchases on new cards abide lower than above-mentioned to the pandemic.15 Indeed, as Figure 6 shows, the abatement in boilerplate balances amid new cards, those originated aural the accomplished 12 months (blue line), is beyond than amid absolute cards (orange line) back the alpha of the pandemic. The boilerplate antithesis on a new agenda beneath from $1400 in December 2019 to $950 in April 2021, admitting the boilerplate antithesis on an absolute agenda beneath from $1900 in December 2019 to $1600 during the aforementioned periods. That is, alike as the cardinal of new originations connected to backlash in 2021, the boilerplate balances on new cards connected to decline. From May through July of 2021, as boilerplate balances began to recover, they grew added for new accounts (5.8 percent) than absolute accounts (3.7 percent) but the accumulative net abatement back the alpha of the communicable charcoal beyond for new accounts.
To appraisal the addition of this beyond abatement amid new accounts, we accomplish a simple apocryphal ciphering what accumulated balances on new accounts would accept been if balances on new and on absolute accounts had beneath at the aforementioned rate. We again account how abundant of the absolute abatement in balances can be attributed to the stronger abatement on new accounts. Absolute acclaim agenda balances in our sample beneath 13 percent from December 2019 to December 2020 and a added 7 percent in the aboriginal four months of 2021. The steeper abatement in balances on new cards—due to both differences in originations and usage—can explain about 21 percent of the abatement in 2020 and 13 percent of the abatement through April 2021.
Adams, Robert M., and Vitaly M. Bord (2020). “The Furnishings of the COVID-19 Shutdown on the Customer Acclaim Agenda Market: Revolvers against Transactors,” FEDS Notes. Washington: Board of Governors of the Federal Reserve System, October 21, 2020, https://doi.org/10.17016/2380-7172.2792.
Batty, Michael, Ella Deeken, and Alice Henriques Volz (2021). “Wealth Inequality and COVID-19: Affirmation from the Distributional Financial Accounts,” FEDS Notes. Washington: Board of Governors of the Federal Reserve System, August 30, 2021, https://doi.org/10.17016/2380-7172.2980.
Frankel, Robin Saks (2021). “How Covid Has Afflicted Americans’ Acclaim Behavior.” Forbes. https://www.forbes.com/advisor/credit-cards/how-covid-has-changed-americans-credit-behavior/
Adams, Robert M., Vitaly M. Bord, and Bradley Katcher (2021). “Why Did Acclaim Agenda Balances Abatement so Abundant during the COVID-19 Pandemic? ,” FEDS Notes. Washington: Board of Governors of the Federal Reserve System, December 03, 2021, https://doi.org/10.17016/2380-7172.3021.
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