Credit Card Debt Has Dropped, But Inflation May Change That

Over the past few years, credit card balances were paid down and delinquent accounts became less common. But two years after the COVID-19 pandemic began, those trends — spurred by increased savings and relief programs — could evaporate, especially as inflation soars.

The pandemic economy unexpectedly changed many households’ finances for the better — personal savings increased and debt decreased. Now, however, inflation is high, inflows like the advanced child tax credits and expanded unemployment benefits have ended, kids are back in child care, and parents have returned to the office. The money habits we had in 2020 and 2021 likely won’t last. Here’s a look at how credit card usage in particular has changed and how people can protect their credit as personal finances stand to shift again.

Cardholders used less of their limits

Over the past decade, credit card balances hovered at about 23% to 24% of their limits, according to data from the Federal Reserve Bank of New York. But in the second quarter of 2020, they dropped to 21%. This seems like a modest dip, but that difference of 2 to 3 percentage points is considerable when you’re talking about hundreds of billions of dollars in total debt.

It was the first time since at least 1999 that credit card balances were at 21% of their limits. They hit 20% in the first three quarters of 2021.

Falling utilization can happen because of higher credit card limits, lower balances or a combination of the two. During this period, lower utilization was mostly due to lower balances.

Balances also fell

Nationwide, credit card balances have typically totaled roughly $800 billion over the past five years, according to the New York Fed. From the first quarter of 2020 to the first quarter of 2021, credit card balances fell nationally by $123 billion, or nearly 14% — the biggest single-year drop since 2001.

Those national balances rose in the third and fourth quarter of the past year, but the end of the year has come with credit card balance increases in each of the past five years, as spending rises toward the holiday season. When data for the first quarter of 2022 is released in coming weeks, it will indicate whether this most recent jump was seasonal or the start of a more sustained climb.

At the state level, per capita balances fell across all 50 states and Washington, D.C., from the end of 2019 to the end of 2021. They dropped the furthest in California, Hawaii, Oregon and Rhode Island, where they fell 13% during this period. View all state-level per capita balances here.

Fewer accounts moved into delinquency

The share of newly delinquent credit card accounts began falling in the second quarter of 2020, when the pandemic was getting into its early full swing. This downward slope has continued since. As of the last quarter of 2021, it stood at 4.1%, the lowest in at least 18 years, according to the New York Fed.

Furthermore, the share of credit card accounts being charged off — when a bank writes off a seriously delinquent debt as uncollectible — has fallen below 2% for the first time since at least 1985, according to data from the St. Louis Fed.

The drop in delinquent accounts has not been unique to credit cards, however. Programs designed to buffer potential household economic effects of the pandemic — such as mortgage forbearance and student loan payment pauses — meant that the share of total debts going into new delinquency likewise began falling in the first half of 2020, hitting an 18-year low of 1.9% in the third quarter of 2021.

What might reverse these positive trends

Pandemic relief programs such as rental assistance, mortgage forbearances, advanced child tax credits and stimulus payments all contributed to Americans saving more. This increase in personal savings meant having more money to pay for goods and services outright, and more money to pay down debt. But as these programs have subsided, so has the personal saving rate. As a result, many credit card holders will likely soon find themselves in situations similar to where they were before the pandemic began. Having paid off some credit card debt can make managing household finances easier only if cardholders are able to keep that debt off.

Perhaps the biggest thing working against lower credit card balances and up-to-date accounts is inflation.

In response to expected rising prices, some people may feel compelled to make big-ticket purchases now to avoid spending more on them at a later date. At the other end of the spectrum, consumers with less discretionary income will feel a pinch from rising prices. With the cost of food, gasoline and nearly everything else eating into a finite amount of money on hand, credit cards may once again be a lifeline.

Managing credit cards in 2022 and beyond

The ability to stick to good credit use habits may ebb and flow over the years — particularly in the face of household and global economic turmoil — but keep these best practices in sight as a goal.

Don’t spend more than you can pay off in a single month

Paying off your balance each month keeps your credit healthy, perhaps even “excellent” according to the credit bureaus’ systems. The myth that you have to carry debt to keep improving your credit is just that, a myth.

And carrying a balance from month to month racks up interest charges quickly. For example, amassing $2,000 in credit card debt and only making a minimum payment would cost about $2,870 in interest, on average — more than doubling the cost of what you purchased — and take more than 16 years to pay off.

Keep utilization under 30%

Having a balance higher than 30% of your limit on any card or across all your accounts can damage your credit, not to mention make it difficult to pay off if life throws something like a job loss your way.

If you hit a wall, make at least the minimum payment

In times of financial strife, you may struggle to pay off your credit card balance in full. In these instances, making only the minimum payment is perfectly acceptable. Though paying the minimum can be a recipe for hundreds if not thousands of dollars in additional interest, small payments are better than no payments at all.

Know when (and where) to find help

If the minimum payment on your credit card(s) becomes unmanageable, the first place to turn is your card issuer. More than 1 in 20 Americans were on a credit card hardship program between March 2020 and November 2021, according to NerdWallet’s annual Household Debt analysis. But credit card hardship programs are not only a pandemic relief program. They are designed to help people who are experiencing difficulty paying their bills due to many types of issues — unemployment, illness and natural disasters, for example.