The past few months have seen a dramatic increase in credit card balances across the United States, with a record $1.08 trillion balance in the third quarter of 2020. This marks a 19% increase from the same period a year prior, and shows the state of consumer spending and the fragility of the economic recovery.
This spike in credit card usage can be attributed to a combination of factors. For one, the pandemic has put many people in a precarious financial situation, with people losing jobs and cutting back spending. This has made credit cards more appealing as a tool to bridge the financial gap created by lost income. In addition, stay-at-home orders have driven more online purchases, which made it easier for people to use their credit cards to make purchases. Interest rates have also gone down, making borrowing more attractive.
The high levels of consumer debt can have serious implications for the economy and for individuals, as interest payments can quickly build up. It is possible that even when the pandemic is over, many people could find themselves saddled with large amounts of debt in the form of high-interest credit card balances. Given that much of the spike in credit card balances was driven by necessity, rather than reckless spending, it is important that changes to the household debt levels are taken once the pandemic is over.
As for how we got here, it’s a combination of the various economic distress linked to the pandemic, the lower interest rates and the convenience of online purchases. The good news is that if these trends continue, it could help the economy recover and prevent Americans from getting saddled with too much debt.