COVID-19 stimulus cash helped clear credit card debt.
While it’s estimated that over $280 billion in COVID-19 relief funding was stolen by fraudsters, a new report shows that many Americans used their stimulus checks to pay off their credit card debt.
According to a report from the U.S. Government Accountability Office (GAO), a significant number of people chose to use their pandemic stimulus payments to reduce their credit card balances. This trend reached its highest point in recent years, indicating a shift in financial priorities.
Relief Funds and Credit Card Debt
When the COVID-19 pandemic hit the United States and businesses shut down, policymakers implemented various forms of relief to prevent an economic collapse. These measures included enhanced unemployment insurance, advance child tax credit payments, and stimulus checks, resulting in approximately $4.2 trillion in disbursed relief aid.
The distribution of funds was intentionally designed to be quick and hassle-free, allowing individuals to access the money easily. However, this approach also created opportunities for fraudsters, who managed to steal over $280 billion in relief funding, while an additional $123 billion was wasted or misused.
How Americans Used Relief Payments
Despite the controversy surrounding the distribution of relief funds, a significant portion was used by Americans to pay down their credit card debt. This suggests that instead of using the money for essential needs like food and shelter, some individuals chose to improve their financial situation.
The GAO report revealed that during the disbursement of the second and third stimulus checks, credit card payments increased by an average of $20 and $61, respectively. Additionally, when advance child tax credit payments were issued, the average payment amount increased by $37 each month.
As a result, the percentage of U.S. credit card holders carrying a balance decreased from 50 percent to 45 percent between April 2020 and December 2021. Late payment and default rates also reached historic lows, particularly among consumers with credit scores below 620.
Rising Debt Levels
However, as the pandemic recedes and the economy recovers, credit card balances and debt defaults have been on the rise. A recent report from the Federal Reserve revealed that U.S. household debt reached a record $17.06 trillion in the second quarter of 2023, with credit card debt hitting an all-time high.
After a contraction in the early stages of the pandemic, credit card balances have consistently increased year-over-year for seven consecutive quarters. In the second quarter of this year, credit card balances rose by $45 billion, reaching a series high of $1.03 trillion.
Correspondingly, credit card delinquency rates have returned to pre-pandemic levels, with a transition from 3.35 percent to 5.08 percent—an 11-year high. The Federal Reserve Bank of New York attributes this trend to a return to pre-COVID norms, as forbearance measures, policy-boosted income, and limited consumption opportunities during the pandemic facilitated debt repayment.
High Interest Rates and Consumer Pressure
The surge in credit card debt has put significant pressure on consumers, exacerbated by the Federal Reserve’s rapid interest rate hikes. Retail credit card rates have reached a record average of 28.93 percent, compared to 26.72 percent in 2022 and 24.35 percent in 2021.
As a result, American consumers paid a record-setting $130 billion in credit card interest and fees in 2022. Variable-rate loan costs increased, leading credit card companies to charge consumers over $105 billion in interest and more than $25 billion in fees—another all-time high.
Some lawmakers and regulators have called for caps on credit card rates and reduced fees to alleviate the burden on consumers. Senator Josh Hawley introduced a bill to cap credit card rates, highlighting the financial strain faced by working Americans.
Furthermore, auto loan default rates have also surged, indicating potential difficulties for American consumers in managing their debt.
How has the decrease in financial assistance from relief programs affected credit card debt levels?
D debt levels are once again on the rise. According to the Federal Reserve, outstanding credit card debt in the United States reached $981 billion in February 2022, marking the highest level since January 2020.
The increase in credit card debt can be attributed to several factors. Firstly, as restrictions and lockdown measures were lifted, consumers resumed spending on discretionary items, resulting in higher balances on their credit cards. Additionally, rising inflation and increased prices for essential goods and services further strained household budgets, pushing some individuals to rely on credit cards to cover their expenses.
Another contributing factor to the increase in credit card debt is the decrease in financial assistance from relief programs. As the economy reopened and life returned to a semblance of normalcy, supplemental unemployment benefits were reduced or discontinued entirely. This reduction in income made it more difficult for individuals to make their credit card payments in full, leading to increased balances and accrued interest charges.
Furthermore, the temptation to overspend and the ease of purchasing items on credit contribute to the growing credit card debt levels. The convenience of online shopping, coupled with enticing promotional offers and rewards programs, can entice individuals to spend beyond their means and accumulate debt.
It is crucial for individuals to exercise caution when using credit cards and manage their debt responsibly. Creating a budget, tracking expenses, and prioritizing debt repayment can help prevent excessive credit card debt. Additionally, seeking financial counseling or assistance from professionals can provide guidance on debt management strategies and promote financial well-being.
In conclusion, while a significant number of Americans used their stimulus checks to pay off their credit card debt, rising debt levels indicate that caution is still necessary. As the economy recovers, individuals must be mindful of their spending habits and make efforts to reduce and manage their credit card debt effectively. By doing so, individuals can achieve greater financial stability and avoid the negative consequences associated with excessive debt.
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