Credit Card Debt Drops for The First Time in 8 Years

Last Update: December 29, 2021 • Debt • Financial News •

Despite the current recession, consumers have paid off more than $73 billion in credit card debt during 2020. This is the first time overall credit card debt has decreased since 2013. Since 2014, all debt (mortgage balances, auto loans, personal loans, student loans, and credit card balances) have been steadily increasing.

Outstanding credit card debt dropped by 9%, which is $756 billion at the end of 2020’s third quarter. According to Experian, consumers charged $324 billion to credit cards between 2010 and 2019, bringing total credit card debt levels from $605 billion to $829 billion at the end of 2019.

The average credit card balance in the United States is now $5,315, which is 14% lower than last year.

Analysis of FDIC Data

According to our FDIC data analysis, total credit card debt fell sharply between 2008 and 2011 but has risen steadily since 2011. In 2019, total credit card debt peaked at $829 billion.

Not all age groups have equal access to credit. Consumers between the ages of 50 and 59 use credit cards more than other age groups and have an average credit card debt of $8,364. Borrowers between the ages of 40 and 69 had the highest average credit card debt of any age group.

Higher-earning individuals carry less debt when evaluated as a percentage of their income. Those with an average income of $15,100 had an average of $2,100 in credit card debt, which is 13.91% of their income. With an average income of $260,200, the highest earners had an average credit card debt of $12,500, which is 4.8% of their income.

Why Have Americans Paid Down Their Credit Card Debt?

It makes sense that revolving debt levels would increase in a recession, as many households have less money to spend.

Sweeping shutdowns of restaurants and retail businesses due to Coronavirus early in 2020 and throughout the summer meant many households had fewer opportunities to spend discretionary income. In some households, uncertainty about the future prompted people to direct those savings to pay off high-interest debt.

Federal relief programs put money directly into consumers’ hands with a one-time stimulus check of $1,200. Suspension of student loan payments and the forgivable Paycheck Protection Program helped young business owners increase their cash flow, even as small businesses suffered due to Coronavirus.

Facing an uncertain future, many households elected to pay down credit card debt with Coronavirus relief programs funds.

Credit Cards May Serve as an Emergency Fund During 2022

Even though credit card balances dropped in 2020, Americans opened more than 12 million new credit card accounts throughout the year. While this increase in new accounts would normally signal an upcoming increase in overall credit card debt levels, account owners aren’t using the cards.

For the first time in more than ten years, credit card utilization rates are below 25% after dropping more than 4% during 2020. This is the second most important factor in calculating FICO credit scores, which means that the average credit score is rising.

According to Experian, FICO credit scores and average credit utilization ratio are connected. FICO credit score ranges decrease as average credit utilization ratios increase.

FICO Score Range/Average Credit Utilization Ratio

300-579 (Very Poor) – 73%

580-669 (Fair) – 51%

670-739 (Good) – 32.6%

740-799 (Very Good) – 12.4%

800-850 (Exceptional) – 5.7%

Consumers who pay down their credit cards often see an uptick in their FICO credit scores. Higher scores mean easier access to cards with lower interest rates and higher credit limits.

For many households, credit cards are for “emergency only” use. Paying down balances and opening new accounts could mean that financial uncertainty inspires consumers to create a safety net with their available credit.

How to Get Out of Debt in 2022

Make more than the minimum monthly payment

Households that would like to lower their credit card debt should try to make more than the minimum payment on their credit cards each month. This cannot be easy with a tight budget. Eliminate wasteful spending by canceling unused subscriptions. Redirect those funds to pay off credit card debt.

Get a personal loan to pay off credit cards

Balances on high-interest credit cards could go up each month, even if the account owner doesn’t make new charges and pays the minimum amount due. Consumers with decent credit could consider getting a personal loan with a lower interest rate to pay off credit cards.

Use upcoming $600 stimulus payment to pay down credit cards

An additional stimulus payment from the government could help consumers reduce their credit card balances. The second round of $600 per individual stimulus payments making less than $75,000 per year is in the works.

It may be wise to use that money to eliminate credit card debt, reducing overall credit utilization rates.

Falling Credit Card Debt is Good News for American Households

Americans pay an average of 16.61% APR on their credit card debt. Lowering balances increases the number of money families have available to pay other bills every month.

While record-low credit card debt levels, falling credit utilization rates, and rising FICO credit scores improve many Americans’ overall financial health, these trends happened over just a few months amid a global pandemic. We may see further changes to the overall financial well-being of American households as the future unfolds.

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Rachel Morey

Rachel Morey is a journalist specializing in automotive, insurance, and finance content. She has been writing professionally for nearly a decade and has projects in print and broadcasting. A native Iowan, Rachel as a special fondness for the open roads of rural America.

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