COVID-19s Impact on Consumer Debt

Key Takeaways
  • The pandemic disrupted the economy and eliminated nearly 10 million jobs in 2020.
  • While the economic recovery is progressing and unemployment is falling, consumers increased savings and targeted debt reduction in this time of uncertainty.
  • Direct aid and forced closures compelledreductions in spending, giving consumers the means to improve their finances in themidst of the pandemic.

The COVID-19 pandemic created an unprecedented time when consumers faced economic uncertainty of colossal proportions. Unemployment rose to 14.8%in April 2020 and then promptly fell as businesses reopened after months of closure. As of February 2021, the unemployment rate sat at 6.2%, still nearly double the 3.5% rate the country experienced in February 2020, before the pandemic hit.

Not surprisingly, the uncertainty and economic upheaval lead to a recession prompted by forced business shutdowns. Typically,in a recession,incomes fall, and loan defaults rise.

The pandemic of 2020 was different. The government propped up income through direct stimulus payments and enhanced unemployment benefits. Federal, state, and local moratoriums prevented evictions, foreclosures, and utility shut-offs. Many households ended up with more income and fewer expenses than when they held a full-time job. Consumers were free to avoid essential costs typically spent on housing and utilities to pay other bills. In some cases, families were flush with cash, despite the recession.

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Compound extra income with forced spending cuts due to shutdowns and millions of households were in a position to increase savings and pay down debt, despite the recession.

For instance, in January 2021, commercial deposits rose by $97.9 billion primarily because of the second round of PPP loans. Consumer deposits also increased by $226.1 billion, which equates to four years of savings achieved in less than a year.

On the borrowing side of the equation, consumers reduced outstanding loans by $3.5 billion, not including real state mortgages. Outside of home loans, credit card debt makes up nearly half of all consumer debt. In 2020, credit card balances fell by 14%, or 121 billion dollars,to $735.6 billion, the lowest level in four years.

Between generous government assistance and forced business closures that curbed spending, consumers may find they are in a better financial position than before the pandemic. The challenge is that as things return to normal, government subsidies will go away, and spending levels will return to normal.

Households currently struggling despite the assistance provided could find themselves facing foreclosure, owing thousands of dollars in back rent, or unpaid utilities that suddenly come due.

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Families that have been able to pay down debt and save may find that once they return to work, resume their pre-pandemic schedule, and start traveling, they no longer have any extra at the end of the month.

Final Thoughts

As the population becomes vaccinated, normality will return. With its arrival, spending levels will resume to pre-pandemic levels. Putting a post-pandemic plan in place now will help you manage your finances, even after the government stops the flow of direct payments and other aid currently available.

  • Should I use my stimulus money to pay down debt?

    Credit card debt can add hundreds of dollars to your monthly budget because of the high-interest rates charged. Paying down credit cards with stimulus money could lower your monthly expenses and save you thousands of dollars in interest by paying off the account years ahead of schedule.

  • Should I put money in savings or pay down debt?

    Saving money and debt reduction are both essential elements to a sound financial future. To decide which to do first, you must weigh the cost of carrying debt versus how much you will earn from a savings account. In most cases, you are better off paying down high-interest debt as opposed to putting money in savings. However, if you have low-interest debt like a home mortgage or student loans, you may receive a greater benefit from building your emergency fund or adding funds to a savings account.

  • What are the benefits of using my stimulus money to settle delinquent credit card debts?

    When you default on an account, companies like to receive a lump sum payment when they agree to a settlement for less than the total balance owed. Your stimulus check can accelerate your debt settlement by giving you a lump sum payment that a creditor will accept as payment in full.