US Credit Card Balances Drop by $10B in August; Losses for Issuers Reach $53B in 2020

Since the start of the pandemic, credit card debt in the US has declined significantly. According to the Federal Reserve’s report, consumer revolving debt plummeted by $9.4 billion in August 2020. The total debt, which mostly consists of credit card balances, dipped to $985.3 billion at the time.

Based on the research data analyzed and published by Stock Apps, credit card balances during the month dropped by 11.3% on an annualized basis. In July, the drop was less steep, at 0.3% while in June, it was 2.0%.

However, prior to that there were massive drops, 28.6% in May and a whopping 65% in April. In March, there was a 28.2% drop after a 4.2% increase in February. In May, revolving consumer debt sank below $1 trillion for the first time since May 2011, during the Great Recession.

The Federal Reserve report revealed that the overall drop in consumer debt was 7.6% in Q1 2020, while in Q2 2020, it was 30.8%. In August, the total outstanding consumer debt (including auto and student loans and revolving debt), dropped by $7.2 billion to $4.14 trillion. That was a 2% decline on an annualized basis.

On the other hand, the average credit card interest was 14.58% in August, up from 14.52% in Q2 2020. For accounts with a credit card balance, the average interest rate in August was 16.43%, up from 15.78% in May.

Credit Card Debt Sank by $70 Billion in Q2 2020, Steepest Decline on Record

It is noteworthy that since 2015, consumer revolving debt has always been on an uptrend. The percentage increase went from 5.7% in 2015 to 6.9% in 2016 and 6.0% in 2017. In 2018, it grew by 3.6% and for the whole of 2019, there was a 3.8% increase.

Similarly, according to data published by Equifax, there was no dramatic change to US credit card debt since 2014.  It rose gradually from $660 billion in Q1 2014 to $930 billion in Q4 2019. But in Q1 2020, it plummeted to $890 billion, dropping further to around $820 billion in Q2 2020.

During Q2, the drop in credit card balances, which amounted to over $70 billion, was the steepest on record. According to New York Fed analysts, the only other time credit card debt fell during spring was during the Great Recession.

According to McKinsey, US credit card losses could reach $53 billion in 2020, up from $38 billion in 2019. The figure is expected to rise further to $59 billion in 2021, before dropping to $36 billion in 2022.

In the worst case scenario, it could go as high as $57 billion in 2020, more than doubling to $125 billion in 2021. That would see it drop to $72 billion in 2022.

Mortgage Refinance and Originations Could Soar to $4 Trillion in 2020

Non-housing balances during the Q2 2020 period plummeted by $86 billion, which is once again, the largest drop in history.

The same period saw a 0.2% drop in household debt, equivalent to $34 billion, sending the total to $14.27 trillion. It was the first time the US debt burden declined since Q2 2014, as well as the highest drop since Q2 2013.

However, not all forms of debt plummeted in that three-month period. With homeowners refinancing house debts at lower rates, mortgage balances soared.

Mortgage balances, the key component of household debt, increased by $68 billion and reached $9.78 trillion in Q2 2020. New mortgage originations hit $846 billion, the highest level since the 2013 refinance boom.

The figure provided by Black Night for Q2 2020 new originations was slightly higher, which was at $1.1 trillion. Compared to Q1 2020, refinance lending grew by 60% and by more than 200% year-over-year (YoY).

Based on its projections, Q3 2020 refinancing and originations could increase by 25% or more compared to Q2. In that case, 2020 refinance lending and origination volume could hit the highest level ever. For the first time on record, total lending could surpass the $4 trillion threshold.

According to Black Night, the mortgage market was however divided. As affluent borrowers took advantage of near-zero rates, the other end of the spectrum saw delinquencies rise to record highs due to unemployment.

In July, there was a 450% increase in the number of mortgages that were 90 days or more late compared to pre-pandemic levels. These totaled 2.25 million, the highest number on record since the global financial crisis.

August saw 6.88% more delinquent mortgages, dropping slightly to 6.66% in September. Despite the September drop, there was a considerable YoY difference. In September 2019, the figure was only at 3.53%.