The COVID-19 pandemic and credit card market anomalies

By Rob Strand
ABA Data Bank

The COVID-19 pandemic and the partial economic shutdown it precipitated during the first half of 2020 led to the steepest economic decline in recorded U.S. history. As millions of businesses scaled down activities or closed, more than 20 million people lost their jobs and many millions more left the labor force entirely. Most segments of the economy were negatively affected and industries that relied on face-to-face engagement (for example, retail, hospitality, and food services) were hit hardest.

In previous recessions, including the 2008–09 Great Recession, widespread job loss typically led to reduced consumer spending and the 2020 recession was no exception. As shown in figure 1, consumer spending fell much more sharply during the first half of 2020 than during the Great Recession—in fact, personal consumption expenditures fell 10 percent during the second quarter alone, the largest quarterly change on record.

Figure 1: U.S. Personal Consumption Expenditures
Year-over-year percent change (shaded regions represent recessions)
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Source: U.S. Bureau of Labor Statistics

However, the recession was brief—just two months according to the National Bureau of Economic Research, the shortest on record—because it was met with an unusually aggressive response from policymakers and private lenders. The federal government provided trillions of dollars in relief funds, suspended payment requirements for student loans, issued moratoria for bankruptcy and foreclosure activities, and the Federal Reserve loosened monetary policy to ease financial stress on consumers. Meanwhile, private lenders voluntarily offered accommodations to customers through payment deferrals; fee reversals and waivers; and interest rate reductions.

Coupled with reduced consumer spending, these actions provided substantial financial cushions for many households, particularly those with lower incomes. The rapid build-up of savings shaped consumer spending behavior as the economy reopened and consumer spending rebounded. They also brought about atypical trends in the consumer credit card market, including delinquency and default rates, credit utilization, and credit quality and availability.

Using robust credit card data from Argus Financial, this post examines consumer credit card use during the 2020 recession and subsequent recovery.

Consumer credit use during the recession and recovery

The pandemic triggered a whipsaw effect on consumers that resulted in a substantially different experience compared to previous recessions. Initially, consumers sharply reduced spending as businesses closed and unemployment skyrocketed, leading to a sharp reduction in credit card use. Within a few weeks, however, Congress authorized the first of several rounds of relief funding at an unprecedented scale. In response, both spending and savings rose sharply after the first tranche was distributed to consumers in April 2020. Revolving consumer credit remained far below pre-pandemic levels, as consumers relied less on their credit cards and used relief funds and increased savings from payment moratoria to pay down credit card debt.

As shown in figure 2, the 2020 recession had a much more pronounced effect on credit card spending than did the Great Recession, and the effect was similar across risk tiers. In less than a year, however, monthly purchase volumes had nearly recovered to pre-recession levels, even among subprime cardholders. By contrast, during and after the Great Recession, credit card spending among super-prime cardholders was barely affected, while subprime cardholder spending did not begin to recover until two years after the turndown began.

Figure 2: Indexed Monthly Purchase Volumes After Recession Onset (Seasonally Adjusted)
12 Quarters following onset of Great Recession and Pandemic Recession, by Risk Tier

Source: Verisk Financial. Note: Monthly purchase volumes are separated by risk tier and indexed to the beginning of the recession (first quarter 2008 or first quarter 2020). Each line represents the indexed values for the 12 subsequent quarters, by risk tier.

Another notable difference between the two recessions involved consumers’ reliance on credit cards to weather the economic storms. As shown in figure 3, during the 2008–09 downturn consumer use of revolving credit remained elevated as the economy struggled and labor markets weakened, followed by several years of deleveraging. In 2020, however, revolving credit fell sharply during and immediately following the recession but stabilized within a year as the economy quickly bounced back.

Figure 3: Revolving Consumer Credit (SA, Owned/Securitized), Billions Chained June 2022 Dollars

Source: Federal Reserve Board of Governors

As consumers cut back on spending while benefitting from government relief programs, the share of credit card accounts that carried monthly balances (called “revolvers”) fell below 40 percent for the first time on record. By contrast, the share of revolvers exceeded 48 percent in 2009. Similarly, credit card debt measured as a share of disposable income fell sharply in 2020 to a record low, as shown in figure 4. As of first quarter 2022, credit card debt as a share of disposable income was 4.6 percent, nearly a full percentage point below pre-pandemic levels and more than three percentage points below 2008 levels. These figures suggest that most cardholders are well-positioned to meet revolving debt obligations.

Figure 4: Credit Card Credit Outstanding as a Share of Disposable Income (SA)
Source: Federal Reserve Bank of New York and Bureau of Economic Analysis

Access to and affordability of credit during the recession and recovery

Measures that help lenders mitigate risk, such as account closures, credit line reductions, and interest rate and fee adjustments, can also reduce credit access or negatively impact credit scores by inflating credit utilization rates. During the 2020 recession, amid concerns regarding the possibility of rising financial stress due to widespread job losses, banks absorbed the higher risk and undertook a variety of measures to help consumers stay afloat. According to the Consumer Financial Protection Bureau’s 2021 CARD Act Report, “a large and likely unprecedented number of consumers received some form of relief on their credit card debts following the onset of COVID-19, all of which was provided voluntarily by issuers.” Based on monthly attrition rates, these actions successfully forestalled account closures during the pandemic, leading to far fewer account closures than during the Great Recession (see figure 5).

Figure 5: Monthly Attrition Rate, Percent of Accounts
Source: Verisk Financial

The sharp decline in consumer spending triggered by the 2020 recession and subsequent surge also impacted consumer access to credit. The dip in purchase volume and revolving credit during the recession suppressed late payments and reduced charge-offs (see figure 6), which in turn helped protect consumer credit scores. In addition, the share of super-prime accounts rose to 52.8 percent in first quarter 2022, near an all-time high (see figure 7). Maintaining a high share of super-prime accounts while also avoiding widespread account closures—thereby helping to ensure sufficient credit access to consumers across the risk and income spectrums—was a clear success story for credit card issuers during the pandemic.

Figure 6: Delinquencies and Charge-OffsSource: Federal Reserve Bank of New York, Federal Reserve Board

While card issuers avoided widespread account closures during the pandemic, they were generally more discerning when opening new credit card accounts. According to Verisk, new account creation (that is, accounts created in the previous 24 months) was down 17 percent overall on a year-over-year basis at the close of 2020 (and down 32 percent among subprime accounts). Account openings recovered to some extent last year but were still 17 percent below pre-pandemic levels overall as of first quarter 2022. The decline was due to both supply and demand factors: reduced consumer demand for credit cards due to government relief efforts and tighter lending standards as banks took steps to mitigate risk given the downturn.

Figure 7: Share of Accounts by Risk Tier
Source: Verisk Financial. Note: columns may not add to 100 percent due to a small share of accounts in each quarter that are missing risk scores in the Verisk database.

Still, the drop in account creation was less severe and shorter in duration than during the 2008–09 recession and recovery: between first quarter 2008 and first quarter 2011, account creation fell by 53 percent overall (including 70 percent among subprime accounts) and has not to date fully recovered across risk tiers. Once again, card issuers’ ability to maintain access to credit has been an important factor in driving the current economic rebound.

Looking ahead

As the recovery continues, some trends raise concerns about consumers’ revolving behavior. Since the end of 2020, the share of revolvers making only the minimum payments shot up in all risk tiers (see figure 8). This pattern also occurred during the 2008–09 recession and recovery, but the rise seen over the last year has been faster and of greater magnitude. As of the third quarter of 2022, there were four million more cardholders paying the minimum balance than during the recovery from the Great Recession. As interest rates rise, these cardholders will face a growing debt burden that will be exacerbated by high inflation and falling real wages. Over time, this could lead to a significant and potentially rapid increase in delinquency rates and charge-offs, even though delinquencies are currently still well below pre-pandemic levels.

However, based on the latest data available from the first half of 2022, many credit card market metrics continue to revert to pre-pandemic trends. For example, as the lingering stimulative effects of pandemic-era relief programs dissipate, credit card debt as a share of disposable income appears likely to rise in the months ahead. To the extent that any future economic weakness is similar to prior recessions, the unexpected behavior in the credit card market observed during and after the COVID-19 pandemic, such as reduced revolving credit and low attrition rates, is unlikely to repeat.

Rob Strand is VP and senior economist at ABA.