According to a recent report from the Federal Reserve, credit card debt in the U.S. is shrinking at a rate never before seen. The amount of credit card debt on the books of U.S. banks and other financial institutions was $760 billion as of May 23. The debt stood at $860 billion at the end of March.
This new figure represents a 10.5% drop in just 11 weeks. This significant decline in debt is the fastest on record. Previously, American credit card debt shrank 22% during the Great Recession of 2008. That reduction, however, took over a year – and not the three months of the current drop.
What Is Causing the Decline?
The 10.5% decline in credit card debt is attributable to several causes. The most significant reason is a sharp reduction in spending by U.S. consumers and businesses. Due to COVID-19 restrictions, many companies cannot spend in the same ways they were before. Additionally, tens of millions of Americans are out of work. High unemployment is likely resulting in a significant reduction in spending, as tough decisions on personal finance are being made across the board.
Other potential causes for the drop in the debt include CARES Act stimulus checks helping Americans avoid making charges to the credit card accounts, lenders lowering card limits, and banks tightening up their application processes to protect their bottom lines.
New Finding Contradicts an Earlier Fed Report
What makes the 10.5% decline more interesting is that it follows on the heels of an earlier Federal Reserve report showing a rise in household debt. That report indicated that credit card use was on the rise, with more Americans taking on new debt since the start of the coronavirus pandemic. How these two reports correlate remains to be seen, but it is likely a combination of the factors above.
How to Handle Credit Cards During COVID-19
While the coronavirus threat appears to be subsiding, the economic impact of the pandemic remains. Fortunately, there are proactive steps Americans can take to protect their finances. Following practical advice on managing credit card payments can help reduce debt and improve cash flow. Additionally, cardholders can contact their bank for payment relief, like Apple’s Customer Assistance Program. Finally, consumers can take steps to improve their credit score, thus increasing their chances for approval when applying for new credit in the future.
Related Article: Increase Your Credit Card Approval Odds During COVID-19
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