Consumers Chip Away at Debt, Thanks to Relief Programs

African American woman laying in bed online shopping with laptop.

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Pandemic relief programs had their intended effect, if new government data is any indicator, as mortgage and student-loan delinquency dropped to record lows and credit card debt plummeted in the first months of this year.

Total household debt increased by 0.6% to $14.64 trillion in the first quarter of 2021, according to a report released Wednesday by the Federal Reserve Bank of New York, with mortgage, auto loan, and student loan balances increasing but credit card balances dropping sharply.

Key Takeaways

  • Total household debt increased by 0.6% in the first quarter of 2021, according to a Federal Reserve Bank of New York report.
  • Credit card balances dropped the second-most in 22 years of data, a development economists called “confounding.”
  • Federal relief programs for mortgage and student loan borrowers have helped delinquency fall to or near record lows.

The drop in credit card balances, at $49 billion, is the second largest quarterly decline in 22 years of data, and puts balances $157 billion below where they were at the end of 2019. Consumers used the early parts of the pandemic, when restrictions on businesses limited where consumers could spend their money, as a reason to pay down debt, according to an analysis that accompanied the report. But the economy had begun to reopen and consumer spending surged in the first quarter of 2021, making the credit card data “confounding,” New York Fed economists said.

The federal government issued two rounds of stimulus payments—$600 per person in late December and $1,400 per person in March—that hit bank accounts in the first quarter of 2021, which may have allowed consumers to save and spend well above the usual rate while also paying down debt. Wealthier and older consumers were more likely to have chipped away at their credit card debt.

“The decline in the first quarter of 2021 is remarkable because it stands in sharp contrast to the recovery underway in the retail sector as the U.S. economy reopens and travel resumes,” the New York Fed economists wrote in their analysis.

Relief Programs Help

Meanwhile, pandemic relief programs that stopped foreclosures and made forbearance more widely available for people with mortgages helped borrowers at a historic rate, the New York Fed said. About 11,000 new foreclosures were added to credit reports in the first three months of 2021, “by far the lowest” since the New York Fed began the data series in 1999 and nearly seven -times fewer than at this time last year. 

The share of mortgages that were 90 days or more past due fell to a historic low as well. At 0.59%, that rate is half of where it stood a year earlier, in the first quarter of 2020. The housing relief programs begin expiring at the end of June.

Government relief programs also helped student loan borrowers, many of whom are covered by a federal pause in payments and interest accrual. About 6.2% of student debt was 90 days or more behind on payment in the first quarter of 2021. In the first quarter of 2020, before the relief programs took hold, that number was 10.75%. The Department of Education has extended those programs for federal student loan borrowers through the end of September.

Article Sources

  1. Federal Reserve Bank of New York. “Quarterly Report on Household Debt and Credit.” Accessed May 13, 2021.

  2. Liberty Street Economics. “Credit Card Balance Declines Are Largest Among Older, Wealthier Borrowers.” Accessed May 13, 2021.