Finally, some good news for 2020: Americans have paid off a record amount of credit card debt.
In 2020, Americans paid a parcel of credit card debt. In fact, according to data from New York Federal Reserve, the total outstanding credit card balance has fallen by $ 108 billion since the end of 2019.
This is the largest annual drop in total collective credit card debt since the Federal Reserve began recording this data point in 1999.
Fed data shows Americans, on the whole, are reducing their balances rather than accepting new credit. In fact, the number of people applying for new credit cards has declined since the second quarter of 2020, when the COVID-19 pandemic in earnest in the United States.
There has been a lot of bad news this year. But the fact that Americans are making great strides in paying off credit cards is a bright spot.
Here’s what you need to know about the sharp decline in credit card delinquency
The Federal Reserve has a simple explanation for why Americans were so successful at paying off their credit cards in 2020: there just wasn’t much to spend.
The sharp reduction in card balances began in the second quarter, when the total fell by $ 76 billion. It continued into the third quarter when outstanding card balances declined by $ 10 billion. There was a slight upward seasonal correction in the fourth quarter, but the Federal Reserve reports that people are still not spending much.
But the drop in consumer spending caused by the COVID-19 pandemic is only part of the picture. The Federal Reserve also suggests that many Americans have focused on paying down debt.
This also makes a lot of sense. After all, in the face of the economic uncertainty of a pandemic, it’s natural to prepare for a possible loss of income or unforeseen expenses. Paying off credit card debt is one of the best ways to do this because you can get rid of a monthly obligation. and save on interest charges if you reduce your card balance to $ 0.
Americans can continue this positive trend
2020 has been an unprecedented year and it’s a year most of us wouldn’t want to repeat. The reason many people were able to repay their debts was that they could not travel or eat because of COVID-19. But most of us will want to go back to our normal lives and resume these activities once it is safe to do so. However, that doesn’t mean that you can’t keep improving your finances.
If you were successful in paying off all of your debts during the pandemic year, your financial situation should already be much better in the future. After all, you won’t have to pay interest on loans anymore and you won’t have to worry about monthly payments. The money you spent on debt before the pandemic can be reallocated to other purposes, like building an emergency fund or saving for retirement.
If you haven’t yet paid off all of your high-interest debt, it may be worthwhile to continue forgoing expensive trips or dining out until your balance hits $ 0. After all, the habit has been broken now. It may help to sacrifice a little longer to get out of debt.
Spend in moderation
If your spending habits changed during the pandemic, you might decide to reintroduce the splurge in moderation. You don’t have to spend at the pre-pandemic level. After all, if you haven’t been able to dine out at all, you’ll already feel like a treat to eat once or twice a month instead of every week.
If you can avoid taking back all spending you did before COVID-19, you can continue to use the money that was freed up by your changed habits wisely. This may be one of the few silver liners from a rough and depressing year, so it’s worth some serious consideration.