Latest financial study paints a rosy picture for consumer credit -- but will it last?

At the height of the pandemic earlier this spring, unemployment and jobless claims soared. More than 33 million Americans claimed unemployment benefits by June 2020, according to the U.S. Department of Labor.

And to this day, millions of jobs remain at risk -- including hundreds of thousands in the travel, aviation and hospitality sector.

Therefore, it would be understandable to expected that a recently released Consumer Financial Protection Bureau (CFPB) study would not dole out any good news when it came to the national overview of credit card debt, delinquencies and consumer credit.

For more credit card news and travel tips, sign up for our daily newsletter.

However, that actually wasn't the case. In fact, the August 2020 CFPB report on the early effects of the pandemic showed nearly the opposite. So how could it be that while the U.S. economy shrank -- and economic activity stalled -- did we not also see credit card balances and debt skyrocket?

According to the CFBP study, among other factors, that was partially due to major government payment assistance, a sharp decrease in overall consumer spending and card issuers cutting credit limits.

The report looked overall at mortgage, student and auto loans and credit card accounts from March 2020 to June 2020 across the entire U.S., broken down further by socioeconomic groups.

Delinquencies decrease

One of the biggest surprises is that delinquencies on major forms of credit did not increase during the early months of the COVID-19 pandemic, which is in contrast to the period of the U.S. Great Recession of 2007-2009. Federal, state and local assistance likely offset some of the income and employment losses that would typically lead to increased delinquencies.

Perhaps unsurprisingly, the report found that payment assistance was more concentrated among borrowers who lived in areas more severely affected by the COVID-19 pandemic.

Daily Newsletter

Reward your inbox with the TPG Daily newsletter

Join over 700,000 readers for breaking news, in-depth guides and exclusive deals from TPG’s experts

Email address

Sign up

By signing up, you will receive newsletters and promotional content and agree to our Terms of Use and acknowledge the data practices in our Privacy Policy. You may unsubscribe at any time.

Debt and balances also fall

Specific to the credit cards market, the CFPB suggests fewer account openings may have played an important role in limiting access to credit. Applications for new credit cards fell by about 40 percent at the start of the COVID-19 pandemic and remained low through at least May 2020.

Related: What should you consider before applying for credit cards right now?

Therefore, with fewer new card accounts opened during this period, total credit limits were significantly lower than they might have been otherwise.

Financial institutions and card issuers also reduced access to debt by closing existing lines of credit and cutting credit limits. However, the CFPB notes that these effects are likely small in the grand scheme of things.

Instead of ballooning credit card balances, the opposite played out. Balances declined significantly between March and June 2020, reaching almost 10 percent lower by June 2020 compared to June 2019.

Consumer spending

One of the factors was just a lack of overall spending as consumers across the entire socioeconomic spectrum looked to save more money. In fact, the decrease in the average credit card balance holds true even when broken down by credit score, income, race and ethnicity, confirmed COVID-19 cases and unemployment changes.

However, the drop in balances was even more pronounced in areas having more employment, higher credit scores, higher income and living in an area with a higher COVID-19 case rate.

Related: How to recession-proof your credit score

Bottom line

With that said, it remains to be seen whether these rather rosy looking stats will continue in the months to come. With government assistance programs set to end, and spending coming out of the bottom it was at just a couple of months earlier, debt and delinquencies may begin to go back on the rise.

At TPG, we encourage paying off your bills in full each month and be responsible when it comes to your credit card spending. If you plan on opening a new card in the months to come, carefully evaluate your finances to ensure you'll be able to pay your bills on time.