I read an article about how the average American family made it through the pandemic financially. It was about layoffs, the stimulus and more. There was the story of the Dwight family living in rural Illinois that barely used to make $135,000 a year, the husband working on a local farm and the wife as a kitchen helper at a nearby school. When Lloyd Dwight got his first $1200 stimulus check, he immediately bought a new wide screen TV with his Credit Card. Six month later, he realized that the appliance would actually cost him as much as $200 more because of the 16% interest rate on the credit card. He couldn’t pay the card right now as the farm was still not in a position to rehire him. Most of their customers had cut back on their produce orders.
The Dwight’s weren’t the only ones sitting home during the pandemic and using credit cards freely. According to a major study of consumer spending, 51% of Americans accrued more debt during the pandemic than prior to Covid-19. But it wasn’t just that Americans were sitting home and doing most of their shopping on-line. Since they weren’t going out and physically shopping, most of the transactions were done by credit card. According to the Federal Reserve, the average credit card interest rate in the US is 14.65%. So American weren’t just piling on huge balances on credit cards for the increased purchases; they were accumulating whopping interest rates which would eventually have to be paid off and putting many families into deeper debt. The Dwight’s were very careful not to accumulate debt before the pandemic, but because of Lloyd’s layoff they were forced to use their credit cards more.
Even as Americans learned to realize that using credit cards was costly, 70% said that they have no plans to cancel or close an existing credit card as a result of the pandemic. Well, of course, since 38% of credit card users say it’s the only way they ever make a purchase right now. And don’t think that Americans aren’t stressed out over this growing debt. 11% of Americans said they were “very stressed” about credit card debt, as of September — more than any other type of debt, including mortgages, medical, or loans. Instead of being on the decline, 29% of credit card users said they’re using their credit cards more than they were pre-pandemic, particularly when it comes to food and self-care items (e.g. toothpaste).
The story about the Dwight’s continued to disclose that they owed a whopping amount on the mortgage for their suburban home. In December, they finally met with a financial counsellor to reign in their debt. Life in suburbia is less costly than for the urbanites. In fact, city dwellers were more likely to say they’re leaning on credit cards more now than they were pre-pandemic (39%), compared to suburban residents (25%) or rural residents (22%). It appears that what the pandemic taught the Dwight’s and many Americans is that using credit cards means also accumulating a debt. No wonder that when a collection call comes, the pre-recorded announcement says: “This is an effort to collect a debt.” This has forced many to rethink their credit cards and their debt. The evidence is that Americans are indeed paying attention to their debt realizing that the runaway debt may very well spell gloom and doom for them.
Looking back at the effects of the pandemic, By March the full effect of the COVID-19 pandemic had hit. Entire industries came to a standstill, and within that first month more than 22 million Americans filed for unemployment for the first time. The consumer confidence index — a measure of consumer optimism, based on saving and spending patterns — hit a six-year low in April.
Financial counselors say that one of the pitfalls of using credit cards is not realizing the huge interest rates that are attached to them. Since most consumers have no intention of paying credit card debt immediately, they soon find themselves owing the credit card companies and the banks significant amounts of money. What’s worse is that many people have come to use credit cards as their personal banks, in fact maxing out on their credit limit, forcing them to find other sources of money to pay the credit card debt. Suddenly they begin to develop their own Ponzi scheme.
The evidence that Americans are beginning to understand the enormous pitfalls of using credit cards is that balances edged down in December, even as consumers engaged in holiday shopping, as uncertainty about a second round of stimulus checks extended to the latter part of the month. Consumer revolving debt – which is mostly based on credit card balances – was down $3 billion on a seasonally adjusted basis in December to $975.9 billion, according to the Fed’s G. 19 consumer credit report released Feb. 5. In December, credit card balances were off 3.6% on an annualized basis, following November’s revised 0.8% dip and October’s 6.7% drop, which came on the heels of September’s 3.2% annualized gain. These numbers suggest that Americans may finally be getting it!
The result is that It wasn’t all that bad during the pandemic year. For the entire year, credit card balances were down 11.2%. Card balances had been growing before the coronavirus impacted consumer spending and bank lending in 2020. They dipped below the $1 trillion-mark last May, for the first time since September 2017.
Credit counselors say that people are beginning to realize the full impact of over usage of credit cards. But even in our community, the pandemic meant shopping on-line or by phone. Almost everything we paid for was by credit card. We seemed to be on a treadmill as far as credit card usage is concerned.
One credit counselor told me that he counseled his clients to pay credit cards as soon as the bill arrives. But during the pandemic people did not have much disposable income to pay off the credit cards. Even if they did, they were uncertain about the future and held on to their money. He even saw clients that said they did not have much cash around the house. They simply weren’t following their usual habits of shopping and of using cash. Remarkably, the evidence is that while people were sitting home, many were determined to deal with their insurmountable credit card debt.
Shimon, like many of us has three different cards, but he is careful never to pass $2,000 on any one credit card. The problem is that his wife and two daughters also have cards and despite his admonitions, some of the credit cards easily went above his self-imposed limits. If there were any lessons learned about credit cards during the pandemic it is that credit card usage is not cheap and that credit cards equal debt that must be repaid unless one falls into a much deeper hole.