It might sound weird with more than 30 million Americans receiving unemployment benefits, and the unemployment rate in double digits, but we actually owe less now than we did before the pandemic started.
According to the New York Federal Reserve, U.S. households reduced their debt outstanding by $34 billion in the second quarter, the first time we’ve done that in six years. The reduction included a record drop in credit card balances, and was the largest reduction since the second quarter of 2013.
The biggest driver was falling credit card debt, which dropped $76 billion in the second quarter after falling $34 billion in the first quarter. The bank attributes one-third of the drop to lower spending and the rest to paying down outstanding balances.
While we shed high-interest credit card debt, many homeowners took advantage of low interest rates and refinanced their homes. The transactions added $63 billion in mortgage debt, which likely is where some of the funds came from to pay down credit card debt.
It will be interesting to see what happens in the months ahead when restrictions on foreclosures are lifted. We again could see debt fall, but this time for the wrong reasons as unemployed homeowners lose their homes.
So far, it looks like higher-income families simply don’t have as many places to spend money, so they’re using this time to chip away at outstanding credit card balances.