US borrowers cut credit card debt despite economic revival

Americans pared back their credit card borrowings by $49bn in the first quarter as the US recovery gathered pace, a development that Federal Reserve researchers described as “confounding” and “remarkable” in the context of an economic revival.

A report from the Federal Reserve Bank of New York showed that total US household debt hit a record $14.6tn in the first three months of the year, up 0.6 per cent from last year’s fourth quarter, as mortgage originations remained near record highs and balances for auto and student loans increased.

However, US credit card balances fell by the second-greatest amount in a statistical series dating back to 1999, surpassed only by the $76bn decline in the second quarter of last year as the pandemic forced the lockdown of the US economy, the New York Fed said.

“One of the most confounding changes in debt balances is that of credit cards,” New York Fed researchers said in a blog post. “The decline in the first quarter of 2021 is remarkable because it stands in sharp contrast to the recovery under way in the retail sector as the US economy reopens and travel resumes.”

The drop in credit card balances helped to offset increases in auto and student loan balances, pushing non-housing balances $18bn lower than the previous quarter. Mortgage originations, including refinancings, reached $1.1tn, only slightly below the record of last year’s fourth quarter, as mortgage balances rose $117bn to $10.2tn.

The New York Fed researchers cautioned in a blog post that the “varied and irregular” impact of the pandemic on consumer borrowers meant that the decline in credit-card balances “should be interpreted with caution”.

But they added that “surging retail sales volumes suggest stimulus checks, forbearance programmes, increasing consumer confidence, and pent-up demand may be both supporting consumption and serving to help borrowers reduce expensive revolving debt balances”.

The Fed researchers said it appeared that both upper-income and lower-income households were paying down credit card debt. But they added that younger people have been borrowing more on their cards in recent months in contrast to older borrowers.

“We think this reflects, to an extent, the differential response to the risks from the virus itself — younger people have begun to resume their outside activities, while older people were more likely to remain cautious about the risk, opting to continue to stay home,” they said.

The reshaping of the US financial landscape by government and bank forbearance programmes was also underscored by the report.

Consumer credit delinquencies fell further below their levels at the start of the pandemic. The New York Fed said 3.1 per cent of outstanding household debt was in some stage of delinquency, 1.5 percentage points lower than in the first quarter of 2020.

Home foreclosures hit their lowest level in the statistical series dating back to 1999.

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