The Federal Reserve announced this week that American revolving credit is now below $1 trillion for the first time in almost three years. This news shows that Americans are paying off their accounts during the health crisis. In May, total credit card debt came down by $24 billion.
What’s Driving the Change?
With consumers unsure of how the economy will fare in the wake of the Coronavirus Pandemic, spending has decreased across the board. Statewide lockdowns have also played a part. Restaurants and stores have been closed or have offered limited services in recent months. This makes it less likely for consumers to go out and use their cards for spending.
While eCommerce has been boosted during the health crisis, a significant portion of spending in this area has been on essential goods and groceries. Americans are buying the things they need most and are then putting residual income back into their credit card accounts.
With unemployment still high at 11.1%, and the job outlook being uncertain, families are also choosing to pay their debts now in case their situations change in the short term.
The Benefits of Paying off a Credit Card
A strong credit score is a valuable financial asset. Using savings or income to pay off short term credit card debt comes with significant advantages.
- Regular payments can improve credit score.
- Lower debt utilization makes it easier to get finance for large purchases in the future.
- Early payments or larger payments on credit cards will reduce interest paid.
- Lower balances eventually lead to reduced monthly payments, leaving more money available for investment, savings, and other opportunities.
There are no downsides to paying more on a credit card during the health crisis. With consumer spending down, even families on modest incomes can decrease debt utilization. Credit card accounts with low utilization can also be used as financial safety nets for the future.
Making the Most of Today’s Uncertain Economy
Consumers are spending less and saving more in today’s uncertain economy. While savings are important, paying off debt can be just as useful.
Families and individuals should aim for credit utilization below 30%. Anyone intending to buy a home or another significant asset in the next five years will find that paying off a credit card today puts long term goals closer within reach.
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