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As the COVID-19 crisis wreaks havoc on the American economy, the impact on credit cardholders has been massive, but maybe not in the way experts might have predicted when the outbreak began, according to a new report from CompareCards.
CompareCards took a deep dive into more than 400,000 anonymized credit reports of credit cardholders in the 100 largest American metropolitan areas to see how people handled their credit card accounts in the month of February compared to the same number of credit reports in May of 2020.
We found that credit card balances, utilization rates (how much debt you have compared to your available credit) and late payments all fell – at least slightly – in the early months of the pandemic while credit limits and available credit grew.
- National overview of consumer credit card trends
- Credit card balances by metropolitan area
- Credit card utilization by metropolitan area
- Credit card delinquencies by metropolitan area
- The bottom line
National overview of credit card trends
Simply put, these are not the types of numbers you’d expect to see in the early days of a massive economic downturn. Balances fell, utilization improved, and delinquencies decreased.
Typically, when a financial crisis hits, you would expect the opposite of all these things to happen. That’s because so many people view their credit cards as an emergency fund, and when tough times hit, they tend to lean on their credit cards, increase their balances and struggle to make payments.
This economic crisis is anything but typical, however.
While many people were laid off, unemployment benefits increased to unprecedented levels, leaving some Americans making more money without a job than they did with one. At the same time, most businesses were at least partially closed, meaning most Americans had few places to spend their money. (And they certainly weren’t spending it on big-ticket items like vacations.)
That combination of extra money and nowhere to spend it meant that people were able to pay down their credit card balances and keep some cash on hand.
The changes in credit limits and available credit are particularly interesting.
Shortly after the pandemic took hold, we saw banks slashing cardholders’ credit limits and closing credit card accounts throughout the country. Banks did this to minimize their own risk as unemployment claims skyrocketed and it became harder to assess which borrowers were risky and which ones weren’t. Given that, one might’ve expected the overall credit limit to decrease, but it didn’t happen.
While banks were slashing limits and closing accounts for some cardholders, they were likely increasing credit limits for many others.
Those increases were part of issuers’ so-called hardship programs, which offer short-term, temporary relief to victims of disasters such as the COVID-19 pandemic. Issuers’ phone lines and websites were flooded with requests for hardship assistance in the early months of the crisis. Not everyone who asked for help got it, and not everyone who got some help got a higher credit limit, but many certainly did, and that likely contributed to the overall increase in credit limits we see in our study.
Credit card balances by metropolitan area
- Of the nation’s 100 largest metropolitan areas, 15 saw their average credit card balance fall by 10% or more, with the three of the top 4 declines happening in midwestern cities (Des Moines, Iowa; St. Louis; and Minneapolis). Just four cities saw their collective balances increase.
- New York, the city hit hardest by the pandemic, saw its average card balance decrease by 6.8%. New York City ranked No. 60 among the 100 cities reviewed.
Credit card utilization by metropolitan area
Your credit card’s utilization rate compares how much debt you have to how much credit you have available. Say you have $3,000 in debt and $10,000 in available credit, your utilization rate is 30%, which is typically thought to be the number cardholders should stay at or below to have good credit.
- Three of the nation’s 100 biggest cities saw their utilization rates fall by at least 10% – Kansas City, Mo., El Paso, Texas and Albuquerque, N.M. – and 51 cities saw at least some decrease. Only two of the top 10 cities with the biggest decreases were east of the Mississippi River.
- Utilization rates climbed in 48 other cities, including double-digit jumps in Cape Coral, Fla.; Tulsa, Okla.; Charleston, S.C.; and Chattanooga, Tenn. (One city, Detroit, was unchanged.) Cities that saw the biggest increases, 5 out of 6 were in the southeastern U.S.
Credit card delinquencies by metropolitan area
All but one of the nation’s 100 biggest cities – sorry, Stockton, Calif. – saw a decrease in the number of residents who were 30 days late with a credit card payment. The report showed that 93 of the 100 cities saw drops of at least 10%, including seven cities where the rate fell by at least 50%.
These massive decreases in late payments aren’t simply because people have more cash on hand. The Coronavirus Aid, Relief and Economic Security (CARES) Act likely played a major role as well.
The CARES Act states that if you are current with your card payment when you agree to receive payment help from your issuer because of the pandemic, that issuer must continue to report your payments as current for the duration of your agreement.
For example, if your issuer lets you skip two months of card payments, your credit report will continue to show your payments as current for those two months even if you don’t pay. However, if you are already late with a payment and ask for help, the CARES Act protection won’t apply to you.
Because of those rules and the fact that so many cardholders asked for and were given hardship assistance with their payments in March, April and May, it makes sense that we would see a sharp decline in the number of folks who are 30 days late with their payments.
The story is quite different when looking at those who are 90 days or more late with payments:
- Nearly a third (33) of the nation’s biggest cities saw those percentages increase. Two of those cities – Portland, Ore.; and Scranton, Pa. – saw increases of 50% or more.
- Still, 67 cities did see their 90-day delinquency numbers decrease. Government relief and extra unemployment benefits might have played a role.
The bottom line
Credit cardholders are doing remarkably well, considering the overall state of the economy. Delinquencies are down. Card balances are down. Utilization rates are down. However, there’s plenty of reason to be skeptical that these positive trends will continue.
If expanded unemployment benefits are allowed to lapse, that will have an enormous impact on credit cardholders. That extra $600 a week has allowed consumers to do more than just get by while jobless. They’ve been able to pay down bills and save money. Take those benefits away and that ends.
Also, CARES Act protections will expire in coming months. So, too, might card issuers’ continued willingness to allow struggling cardholders to defer payments. Those would have a huge impact on cardholders as well.
Finally, as more businesses open and consumers have more opportunity to spend, people likely will do so. That will put more strain on household budgets, drive up card balances and make many people’s financial situations far worse than it is now.
The best thing consumers can do is continue to put money away for a rainy day, if they can. The pandemic has clearly shown just how quickly economic fortunes can change. The more you can do to prepare for the unexpected, the better off you’ll be.
Analysts compared the February 2020 anonymized credit reports of over 400,000 My LendingTree users with at least one active credit card to the same number of anonymized (400,000) credit reports in May 2020. These were limited to people residing in the 100 largest metropolitan statistical areas (“MSAs) by population. For both time periods, analysts calculated the percentage of cardholders who had at least one maxed out credit card, multiple maxed out cards, were 30, 60, and 90 days late on at least one card, and the average total card balances, total credit limits, total credit available and credit utilization rate for each MSA and across all users in the sample.
Additional reporting/research by Kali McFadden.