The consumer credit system allows you to acquire goods and services without having to pay for them in cash at the time of purchase, and there is no larger market in the world for consumer credit than the USA. In May of 2020 consumer debt hit a record of 14.3 trillion USD.
In an active, pre-COVID19 economy, such large numbers of consumer debt were worrying, however, all reports led to the conclusions that, while the numbers are recorded large — there was no indication of private parties having issues with paying these debts as foreclosure rates were reported to be the lowest since Q1 of 2008, just before the last recession hit.
But as COVID19 ravages the US economy, with unemployment being at a reported 14.7% (with the actual numbers being higher due to the flawed unemployment registry system) all of that accumulated debt hasn’t disappeared. In fact, more than a third of the US workers are active participants in the gig economy, which refers to independent contractors working for companies like Uber, household income has taken a financial downturn for many who also happen to be the group that has the largest consumer debt, compared to income. The industries suffering the most — such as hospitality and leisure — depending on legislation regarding COVID19, will most likely not see a swift recovery.
The good news is that lenders that report to credit bureaus will not cause consumer credit scores to go down, due to the CARES act, and many temporary debt relief programs are in place, that have urged not only financial institutions but also service providers and insurance companies to provide relief to consumers in ways of lowered monthly payments, lower interest rates and relief from late fees. As a temporary solution — this reduces the stress on the consumer which is going to help lower the uprising credit defaults and foreclosures. If these programs stay in place long enough for the economy to reach some level of recovery, the actual damage felt by the consumer should be relatively low, however, that is only speculation, and history has shown that in times of recession — there is no escape for credit defaults.
Right now, interest rates are at rock-bottom, so if you can actually get a loan approved by a bank right now, you’re looking at a historically low price. Credit card rates were down to 16.22% in May, so technically this is the time to accumulate debt. Banks, however, have taken strict measures to decrease debt activity, closing down accounts and lowering credit limits, and approximately 50 million people saw their limits lowered or their accounts completely closed just before the middle of May, as a sustainability tactic for at-risk groups.
The future of this market is dependant on many variables. At this point, most speculations are futile as we have not dealt with such a pandemic and the economic backlash it will cause. The economic recovery will be based on individuals and the government’s choices which will vary across the US. Banks must prepare for a slow economic recovery and potentially having to deal with multiple waves of COVID19 and mitigate the risks with all loans for the foreseeable future.
This already fragile market is right now fully dependant on the government and individual organisations continuing relief programs until a given point in the recovery process, as the consumer credit market is going to impact and financially ruin a large chunk of US households, so if the given relief programs do not follow the economies recovery process, we are looking at another full-blown crisis.