Since Americans tightened their belts during the coronavirus pandemic, total household debt has fallen quarterly for the first time since 2014.
The Federal Reserve Bank of New York reported that total household debt fell by $34 billion in the second quarter, a decrease of 0.2%. This is the largest decline since the second quarter of 2013.
However, the reduction in household debt does not mean that Americans will be better financially. Another survey from the real estate website Apartment List found that one-third of people were unable to pay their rent or mortgage in full this month.
Indeed, the decline in debt actually reflects that people are cutting spending, not that people are paying off loans. The main reason for the decrease was a reduction of 76 billion US dollars in credit card balances, which was the largest decline since 2000.
“As spending rebounds, the number of outstanding debt will also rebound,” said Bankrate chief financial analyst Greg McBride (Greg McBride).
But some believe that the growth of household debt may be hindered by lenders, who are wary of taking more risks during the pandemic. Tendayi Kapfidze, chief economist at LendingTree TREE, said, “As lenders are tightening standards for new loans, and some banks are cutting credit limits and closing accounts, the growth of consumer credit may continue to be suppressed.” + 0.76%.
For example, compared to before COVID-19, many mortgage lenders require applicants to have a higher credit score to qualify for loans.
At the same time, from mortgages to student loans, the wide availability of debt has led to a decline in delinquency rates. Mortgage loans, auto loans and credit card delinquency rates have all declined. The Federal Reserve Bank of New York found that in the field of student loans, approximately 88% of borrowers repay $0 on schedule.
“‘Lenders are strictly implementing the new lending standards, and some are reducing credit lines and closing accounts.”
“With forbearances having been rolled out nearly universally, not surprisingly, the repayment rates of student loans have declined sharply,” New York Fed researchers wrote in a blog post about the quarterly debt report.
It could be a long time before the economic downturn caused by the pandemic translates into upticks in loan defaults and foreclosures, experts say. In the case of mortgages, Americans can get up to 12 months’ worth of payment relief if they have a federally-backed loan, including those backed by Fannie Mae
and Freddie Mac
. As a result, pandemic-related defaults on home loans may not appear in earnest until the second half of 2021.
Americans who were laid off or furloughed may not be receiving boosted unemployment payments at the moment, which could make settling debts more challenging in the interim.
“If you’ve lost your income due to the pandemic, you may have to put other financial priorities first, like keeping a roof over your head and food on the table, said Sara Rathner, credit card expert at NerdWallet. “It’s OK to focus on that now and deal with debts later.”
Rathner’s advice: First, build a rainy-day fund to cover emergencies. Then, pay off debt by meeting all minimum payments and putting any extra money toward the loans with the highest interest rates.
“This can help you stay organized and motivated while ultimately saving you on interest,” she said.