Household Debt Bounces Back: Now What?

In mid-2020, household debt took a surprising turn. In the midst of skyrocketing unemployment and a nationwide wave of small business closures, with about ⅓ of U.S. households reporting a loss of income, credit card balances took their sharpest dip in recorded history. Other non-mortgage debt stayed relatively stable. 

Delinquency rates for most types of consumer debt, including auto loans, home equity lines of credit, student loans, and credit card debt all dropped. 

Q3 2021 Household Debt Tops $15 Trillion

Early in November, the Federal Reserve Bank of New York released its Q3 2021 Household Debt and Credit report, showing that trend has reversed. Total debt began to climb again late in 2020, and has now reached an all-time high of $15.24 trillion. That’s up $890 billion compared with Q3 of 2020, and more than $1 trillion higher than the pre-pandemic total. Credit card balances have increased by $17 billion in each of the past two quarters.

Making sense of the decline in debt during some of the worst modern economic times and subsequent increase as people in Los Angeles and around the country return to work requires first understanding why debt and delinquencies declined during the pandemic. We took a more in-depth look at the impact of the pandemic on debt back in 2020. The short version is that during the pandemic: 

• Enhanced unemployment benefits, government stimulus checks and other assistance actually improved some households’ financial situations in the short-term, diminishing reliance on credit and allowing some to pay off credit card debt and other debts
• Government-mandated halts on student loan collections, certain foreclosures, and other measures to mitigate the impact of the pandemic kept some debts from entering delinquent status and shifted some debt from reporting as delinquent to forbearance or deferment
• Voluntary measures by some creditors suspended payment requirements, preventing delinquency in the short-term
• Credit card issues closed tens of millions of accounts, significantly reducing the aggregate amount of available credit 

In recent months, though, those supports and relief options have begun to fall away. The last federal stimulus checks went out in April. Federally-funded enhanced unemployment benefits ended in September. Federal eviction and foreclosure moratoriums expired. State-level programs and protections were always uneven, and have mostly expired. 

Between June and October of 2021, unemployment rates continued to drop. Average wages edged up. Yet, adults across every age group reported lower financial well-being. In September, 42% of people with credit card debt who responded to a BankRate survey said the balances they were carrying had increased since the beginning of the pandemic. 

Among respondents to that same survey, middle income credit card holders (defined as those earning $40,000-79,999/year) were most likely to carry a balance. More than 60% of respondents in this group had outstanding credit card debt. 

What’s Next for Los Angeles Consumers?

The economic recovery from Covid-19 is unfolding differently than the recovery after the Great Recession. While unemployment has dropped quickly across the country, job growth has been uneven. In Los Angeles, unemployment continues to drop, but remains significantly higher than the national average. New issues, such as the loss of more than 750,000 Americans during the pandemic, the continuing challenges of ongoing Covid-19 risk management, and supply chain problems are also impacting aspects of economic recovery.

In addition, many Americans are still seeing the benefits of Covid relief measures. For instance, those who were able to take advantage of rental assistance programs may have been able to shift funds to other expenses. Though the time to apply for Covid-related mortgage forbearances has expired, many are still in forbearance. And, the freeze on student loan payments and collections remains in effect for a few more months. 

That makes the future somewhat unpredictable. What we do know is that credit card balances are already increasing, evictions are back on, enhanced unemployment benefits are gone, and about 477,000 Los Angeles County residents remain unemployed. 

Get Ahead of Financial Challenges

For better or worse, many Los Angeles households are going through financial changes. Whether that means an extended period of unemployment, a new job with a different pay rate and pay schedule, the end of Covid-related benefits, the return of student loan payments, or something else, it’s important to be prepared. 

The time to crunch the numbers and determine whether you need to make adjustments moving forward is, ideally, before you fall behind. If you’re already seeing credit card balances mount or payments get off track, the next best time to look for solutions is now. 

At Borowitz & Clark, we’ve devoted decades to helping people resolve debt and build more stable financial futures. To learn more about how we may be able to help, schedule a free consultation right now. Just call 877-439-9717 or fill out the contact form on this page to get started.