Household debt in the United States decreased $34 billion in the second quarter this year, according to a report released by the Federal Reserve Bank. It is the first decline since the second quarter of 2014 and the largest since the second quarter of 2013.
Credit card balances fell by $76 billion, the steepest decline in the history of the data.
Some might have thought with COVID-19 individuals would turn to credit cards and at least slow that decrease that usually happens in that quarter of the year. Representatives of Utah Valley University’s Money Management Resource Center offered ideas why it may have happened the way it did.
“I think there is a fear that people want to avoid adding to their debt,” said Alisa Nguyen, a financial coach at the center. “Credit card applications have also been down. People are using debit cards instead of cash because so many businesses won’t take cash.”
There is a downside for the businesses, however.
“It has been hurting a lot of stores because they have had to pay more fees,” she added.
Nguyen described differences between the card types and offered some safety steps.
“With a debit card, the funds are drawn right out of your account,” she said. “With credit, you can spend as much as you want, up to your limit. It is easier to stay in your budget with a debit card. You have to be careful, especially of your PIN. If it gets stolen and used, sometimes they use it like a credit card.
“There are stricter rules about credit cards online,” Nguyen continued. “Credit cards are safer online. Consumer rights are a little stronger. You have to be careful not to carry a balance. There are often good rewards, like cash back or travel miles.”
Although she acknowledges the advantages of credit cards, she offered a warning.
“Carry a slim wallet,” she said. “Only take a few credit cards with you, and make sure you have a list of your card numbers and phone numbers for you to contact in case your cards are lost or compromised.”
She noted Federal Trade Commission suggestions that individuals report that loss or theft immediately and follow up with a letter or email. Federal law says once you report that loss, you cannot be held liable for subsequent unauthorized transfers. Keep copies of your letters, send them by certified mail, and ask for a return receipt.
Other precautions include checking your statement for any transactions you did not make. That may be done daily online or on a paper copy of your statement, if that is what you receive.
Any liability you have may be covered by homeowner’s or renter’s insurance. Check with your company to see if that applies or can be added.
Whether you use a credit or debit card, it is important to monitor it closely and report any fraudulent use.
“With either card, you want to make your report right away,” Nguyen said. “This limits your liability.”
It may be convenient when shopping online to have your information stored for when you are ready to make a purchase. Don’t, Nguyen said.
“In the case of a data breach, others would have access to your information,” she said. “Make sure your number is not stored. Log in at the stores you have visited, and take your information off after you are finished.”
A similar situation can occur when you are eating out.
At some restaurants, the server will ask for your card and take it to the register to process it. Nguyen suggests you tell the server you are not comfortable with that and will bring it yourself to the cash register when you check out.
Other types of credit have fluctuated in their overall balances, she said. Balances on home equity lines of credit saw an $11 billion decline, with an outstanding balance of $375 billion.
Auto loan balances were close to flat during the second quarter, but student loan balances increased by $2 billion, most likely brought about by forbearance on the loans and waiver of interest.
The total of non-housing balances had the largest decline in the history of the report made the by Federal Reserve Bank, with an $86 billion decline.