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Many a study from The Ascent reveals surprises. What struck me while reading "Average American Household Debt in 2020: Facts and Figures" is one big question: why are we Americans tightening our belts by paying off credit card debt now?
An interesting contrast
Overall, household debt is up from an average (mean) of $140,416 in 2019 to $145,000 in November 2020. Given the number of shuttered businesses and the high unemployment rate in 2020, it is understandable that overall debt would be up. However, we appear to be cutting personal debt in other ways -- like using less credit and paying down our cards.
According to a recent Household Debt and Credit survey conducted by the New York Fed, Americans owed $807 billion in credit card debt in the third quarter of 2020. That number represents $74 billion less than we owed at the same time in 2019.
It is impossible to know exactly why millions of Americans paid down their credit cards over this 12-month period, but we can make some good guesses.
1. It's an obvious cost-saving move
We can't stop paying our rents or mortgages, and we can't give up grocery shopping. One of the easiest ways to control spending is by paying cash whenever possible, charging fewer purchases, and lowering the amount of interest paid. As we seek ways to cut financial obligations, credit cards are among the first things many zero in on.
2. We've been worried for a while
According to the Commerce Department, retail sales fell by 1.2% during the 2018 holiday season. Right in the middle of the holiday season (November and December), consumers slowed their spending. By March 2020, The Ascent survey found that over 60% of respondents said they were "somewhat" or "very" worried about their finances. In 2020 the reason was COVID-19, but spending slowed more than a year earlier. It seems there is more at play.
3. The "babies" are getting older
The oldest baby boomers turned 74 this year, and by 2030, all baby boomers will be 65 or older. Naturally, these Americans want less debt weighing them down.
4. We feel less secure in our jobs
In a year when millions of Americans lost their jobs, it's natural that many would change their views on job security. For anyone who wonders if they'll have a job next week or next month, carrying credit card debt feels especially risky.
5. We've figured out that bad things can and do happen
Although there was talk of a global pandemic for years, most of us didn't expect it to hit us as it did. We didn't expect the political in-fighting, elbowing for resources, or near-shutdown of the economy. As it becomes clear that we're on our own financially and there may be no one riding to our rescue, it also becomes clear that the smart move is to jettison unnecessary debt -- particularly high-interest debt.
How, in a year of COVID-19 and economic recession, did Americans cut their credit card debt? It is possible that many used all or part of last spring's stimulus payments to pay it down. It may be that some of us saved money on things like transportation and meals out by working from home. If so, that's money that may have been redirected toward paying off debt.
Minimizing or eliminating credit card debt is one of the smartest financial decisions we can make. Still -- it's unfortunate how much financial anguish we had to experience collectively to get serious about taking action.