At the onset of the Coronavirus pandemic, millions of the American workforce struggled to earn a living as they were locked at home to minimize the spread of the virus. This event reduces personal income, which results in a decrease in consumer spending. Economists and experts expected that this would lead to “a spike in living off plastic.”
Despite the massive unemployment, U.S. credit cardholders splurged their income on debt, resulting in a $100 billion decrease in credit card debt from February to June of 2020.
Federal Reserve Bank of New York released a new report explaining, “the second quarter of 2020 saw a staggering $82 billion decline in credit card balances.” The report also highlighted that this event mirrored the economic state during the Great Recession.
The U.S. citizen cardholders reduced their credit card balance and depended on card issuers’ assistance, instead of depending on plastic-money to get through this crisis.
“American households have dialed back consumption and reduced their credit card balances, while forbearances have provided relief to many borrowers who need it.”Federal Reserve Bank of New York
Additionally, transfer payments and enhanced unemployment benefits from the government served as a cushion for economic activities.
The halt in economic activities forked the workforce into two. One part of the U.S. workforce transitioned to a work-from-home setup, and the other part is those who lost their jobs because of the business shutdown. Because of lesser opportunities to spend, those who still have jobs allot their income to savings.
On the other hand, the struggling unemployed depends on how the government will respond and give them life support. These different instances pull the economy in the opposite direction, with one increasing opportunity for investments and the other growing government’s debt.
At the end of July, unemployment benefits expired, resulting in an aggregate decrease in card payments. As reflected in PSCU’s latest shopping trends analysis, the total growth rates of card payments decreased subsequently during the week ending August 4 after Federal CARES Act’s $600 benefits started to lapse. Moreover, there is a 4.3% decrease in spending on credit cards annually.
Banks and financial institutions make strategies to combat the decrease in credit card spending. Paypal and eBay credit cards offer applicants with welcome bonus offers.
Moreover, Mastercard made a wise move on cryptocurrency product plans that signals digital payments in the future. On the other hand, Google Pay will enable customers to access checking accounts starting sometime in 2021.