The surprisingly okay state of consumer debt

The pandemic didn’t create a full-blown consumer debt crisis. Here’s why.

I know we’re all eager to forget, but let’s reflect back on spring 2020 for a moment. It was a season marked by the illogical, unharmonious totems of a looming pandemic: celebrity hand-washing videos, apocalyptic grocery store runs, waves of viral content involving windowsill singing and pot-banging. This global camaraderie might have been heartwarming, if it weren’t all so utterly terrifying. And in addition to the very real fear of a pandemic, many Americans also faced the looming dread of a financial crisis both sweepingly national and disarmingly personal.

In the second quarter of 2020, US unemployment reached 14.8 percent, its highest rate since the record began in 1948. America’s GDP plummeted at an annual rate of 31.7 percent in the same time period. Across a spectrum of industries — mental health care, marketing, hospitality — my friends and loved ones expressed a sense of financial disequilibrium and tightrope-walking economics that followed us well into summertime.

As a reliable income evaporated for a significant contingent of Americans, you might assume national credit card debt increased as those in need leaned on the lifeline — but you’d be wrong.

According to a recent congressional report, credit card balances actually declined sharply, by $76 billion, in the second quarter of 2020. You might also assume that, with the guillotine of joblessness hanging precipitously in the balance, Americans might defer large purchases, like homes or cars. Again, you’d be wrong: By the fourth quarter of 2020, mortgage debt grew to $10 trillion (compared to a fourth-quarter 2019 statistic of $9.56 trillion), and auto loan debt reached $1.4 trillion.

Desperate times, it seems, did not lead to desperate measures. If Americans were facing what many anticipated would be the largest financial slump since the Great Depression, or at least the Great Recession, why were their spending and debt accumulation habits so … healthy? Sociologist and demographer Teresa Sullivan has some ideas.

Sullivan, who teaches at the University of Virginia, has studied consumer bankruptcy for decades, publishing award-winning books on the subject alongside co-authors Elizabeth Warren (yes, that Elizabeth Warren) and bankruptcy specialist Jay Lawrence Westbrook. She says it’s “impossible to look at” consumer bankruptcy without also considering consumer debt. In June, I spoke with Sullivan to parse the patterns of Americans’ personal finances and debt before and during the Covid-19 pandemic.

Our interview has been edited for length and clarity.

The phrase “consumer debt” is one that I think the public tends to misinterpret. What is consumer debt, and what does it look like in America?

In my own work on consumer bankruptcy, “consumer” debt is any debt incurred by an individual or couple (as opposed to a business) — so that would be mortgages, car debt, student debt, bank loans, etc. The Federal Reserve Consumer Credit G.19 report excludes any debt secured by real estate, so it omits mortgages. Of course, the consumer can’t omit the mortgage. The Federal Reserve reported $14.56 trillion of consumer debt after the fourth quarter of 2020.

What was the consumer debt landscape like in America directly preceding the Covid-19 crisis? Who was particularly vulnerable?

First of all, it took the United States a long time to recover from the recession of 2008. People were very cautious about taking on new debt then, but they became less cautious as we moved on in the decade of the teens. So by 2019, the year before Covid hit, total consumer debt was a little over $14 trillion, according to the Federal Reserve and Experian.

There were a lot of people whose finances were in balance, but only barely. They didn’t have emergency savings to fall back on, and when they lost their job, their steady source of income disappeared. The vulnerability was the lack of a cushion.

What were the immediate impacts of Covid-19 on consumer debt?

During the worst part of Covid, people were pretty cautious. Debt did rise, but not all debt rose. For example, the US experienced the largest recorded quarterly decline in credit card balances (about $76 billion, see the Congressional Research Service study of May 6, 2021). For one thing, people stopped spending; they really just cut back on expenditures. That’s one of the reasons that businesses were so hard-hit: Aside from the lockdowns and all the rest of it, people weren’t buying stuff.

But I would say that what really saved it from being a total disaster was the three stimulus checks. That first stimulus check was spent almost entirely on expenses, and it appeared that was the period of highest unemployment. When the second stimulus check came out, people were more likely to spend that on debt; that may be one reason that we began to see a decline in credit card debt. And then by the time we got to the third stimulus check, some people were spending it, some people were buying down debt, but a surprising number saved it. The personal savings rate actually reached a high in April of 2020. Who would have believed it?

How did the financial impacts of Covid-19 shift as the pandemic continued through 2020 and into 2021?

When Congress moved through the CARES Act and the subsequent acts to provide relief for Americans, one of the things they did was provide mortgage forbearance, which meant that if you were delinquent on your mortgage payment, basically, the lender had to put up with it for a while. In fact, the lenders could not tell the credit bureau that you were delinquent. At the same time, they also extended repayment on student loans, and the CDC said you can’t evict rental tenants because of the health crisis.

Federal relief almost surely made a huge difference because people could buy groceries and other necessities, and the forbearance on mortgages and evictions meant they could postpone mortgage or rent payments (but those obligations did not disappear). The larger unemployment benefits also provided cash to the unemployed, sometimes more than their lost earnings.

But it appears that discretionary spending rebounded slowly. Many purchases could be and were postponed (such as clothing). There was a notable decline in college attendance, which meant that students were not paying tuition, room, and board.

The biggest increase in consumer debt was for mortgages. And the biggest group there, at least in percentage terms, has been Generation Z, our youngest generation. Experian says they had a 67 percent increase in mortgage debt. It’s still small, relative to how much debt the older generations are carrying, but it was the biggest increase. This may reflect the fact that they’re trying to get into the housing market.

You mentioned that credit card debt declined during the worst of the pandemic. A report by Creditcards.com found that 51 percent of adults with credit card debt (about 51 million) actually added to their balance in 2020, and 44 percent of them blame the pandemic. Why do you think there is a discrepancy in the statistics, and can both be true?

It’s possible that both are true. Experian reports that credit card debt is down 9 percent between 2019 and 2020. I do think that consumers have become much more savvy about the fact that their highest interest rate is on their credit card balance. You know what your interest rate is on your mortgage, but often with your credit card, you’re not really sure what it is, because with some credit cards, it can fluctuate. Because of the uncertainty and high rates of credit card debt, for some people, if they had money to pay off a debt, that’s what they paid off. I think one of the things the stimulus check did was it gave them an alternative to using the credit card to pay for their everyday expenses.

Now, having said this, there probably were people who put their groceries and everything else on their credit card because they didn’t have any other way to get it. What I would look at, if you could get to it, and you can’t, would be the composition of what people were buying on credit cards. They weren’t buying restaurant meals because the restaurants were closed. They weren’t buying airline tickets. But they could have been using their credit card at the grocery store, at the pharmacy, and in many cases, they could even pay their rent on a credit card. Only the credit card companies could tell you if there has been a change in the composition of the use of the card.

What do we have to look forward to?

First of all, I think it depends not only on the unemployment rate, but also on what happens to wages. If there is some rise in wages, that may give people a bit of a cushion.

The troubling signs to watch will be student loan defaults (after forbearance ends), foreclosures, and evictions. I would watch for any increase in homelessness recorded in the school districts this fall. And the holiday season will be important to watch, as well.

We know that consumer bankruptcy filings dropped a lot in 2020, but they are now rising again. In March, we had 40,000 consumer bankruptcies; in April, we had 38,000. It is a truism among some bankruptcy professionals that people wait to file until they have exhausted every alternative. With the mortgage and eviction protection ending, we will almost surely see more people filing in Chapter 13 to try to save their homes. One way to basically buy more time with an eviction or a foreclosure is to file bankruptcy. Usually when those bankruptcies go up, it could well be associated with an increase in evictions and foreclosures.

The congressional research study I mentioned above notes that compared with the Great Recession of 2008, more homeowners during the pandemic had more home equity, and so they were in a better position to refinance. And the real estate market is booming in many areas, so distressed homeowners may seek to sell their homes and pay off their lenders. Similarly, some people who fall behind on their car loans might be able to sell their cars because there is high demand for used cars right now.

The Census Bureau began doing a survey that was very helpful during the pandemic called the Pulse survey, which comes out every week and asks people about their economic difficulties. In the survey that covered May 12 through 24, there were still 26 percent of respondents who said they were having trouble paying their household expenses. That’s a red flag. And 9 percent of adults were in households where they said that at least some time in the past week, there had not been enough to eat. So it appears to me that the people who have been in dire straits are not going to get out of those dire straits any time soon.

The people who you mentioned experienced the greatest vulnerability pre-pandemic were those who didn’t have a cushion or savings. Do you think that will change?

The people who are sort of scraping by, they’re still scraping by. Life is not necessarily going to get better for them any time soon. Now, there are states that are raising their minimum wage; that could help. But what I would say, just in conclusion, is this whole thing would have been a whole lot worse had there not been the effort to provide stimulus.