By Matthew Dalton and AnnaMaria Andriotis
When unemployment soared this spring at the start of coronavirus lockdowns, credit-card debt and delinquencies were widely expected to surge as struggling households borrowed more to make ends meet.
Instead, amid the deepest economic crisis since the Great Depression, the opposite happened. Credit-card debt in the U.S. and other advanced economies has fallen. Fewer people are late on their credit-card payments. Consumer demand for new borrowing -- through credit cards, personal loans and even pawnshops -- is down sharply.
The main reason, according to economists and financial executives, is government stimulus programs launched in the U.S. and other advanced economies that have worked unexpectedly well. The flood of money, along with debt-relief measures such as deferred-mortgage and student-loan payments, has stabilized the finances of many households and even left some in better shape than before the pandemic -- at least for now.
"We're not seeing consumers increase credit-card balances; in fact, they're continuing to pay down balances," said Peter Maynard, senior vice president at Equifax, the credit-reporting firm that tracks consumer borrowing in the U.S., Canada, the U.K. and other countries. "They're using the injection of government stimulus, quite frankly, to put themselves in a better position."
The phenomenon looms large as governments debate whether, and how, to extend stimulus programs. U.S. lawmakers and the Trump administration are negotiating new stimulus legislation, as the $600-a-week federal unemployment aid expired on Friday.
Canada and the U.K. are extending and tweaking their stimulus programs. European Union leaders, having agreed on a EUR1.8 trillion ($2.06 trillion) spending package, must now decide how to deploy that money in their economies in the months and years to come.
Nearly 18 million Americans are unemployed; that number could rise in the coming months as states reimpose lockdowns because of surging coronavirus infections. Without an extension of U.S. unemployment benefits and other stimulus measures, financial distress indicators such as credit-card debt could quickly start flashing red, economists and finance executives say.
"The cardholder base, given the level of economic distress, has held up remarkably well," said Discover Financial Services chief executive Roger Hochschild in an interview. "Without a doubt, government help is helping people meet their obligations... If it's not renewed, it will drive down the whole economy."
In the U.S., total outstanding credit-card debt fell by 11%, or $100 billion, between February and the end of June, according to Equifax. April was the largest monthly drop in revolving credit on record, while May was the second-largest, according to Federal Reserve data. Personal-loan originations were down by a third in mid-May compared with the beginning of March, according to Equifax.
Since February, credit-card debt is down 11% in Canada, 14% in the U.K. and 17% in Australia. In the eurozone, credit-card debt and other forms of revolving credit for households fell 5% between February and June.
Just four months ago, large credit-card issuers expected Americans' debt levels to be a problem and forecast surging missed payments by the second half of the year. Millions of cardholders had signed up for deferment programs because they were unable to make their monthly minimum payments.
But so far, big cracks in consumer-credit performance haven't materialized. Large credit-card issuers such as Capital One Financial Corp. and Synchrony Financial said many of their customers who entered deferment programs in the spring had exited by June.
During the 2008 financial crisis and other recessions, delinquencies rose when the unemployment rate increased. This time, the number of credit-card accounts in the U.S. that are late on payments has fallen by more than a third, according to Equifax. Most lenders don't include accounts that are in deferment in their delinquency rates.
Part of the decline in credit-card debt is the result of people spending less on their cards because of restrictions imposed during lockdowns. Lenders have also tightened their underwriting standards.
But credit-card debt has continued to fall even as lockdowns were relaxed in May and June and retail spending rebounded. Data from card companies indicate that the pandemic has spurred a shift away from credit cards toward debit-card purchases across spending categories, in part due to government stimulus payments, analysts say.
"Stimulus money goes into the bank account, and debit is the access vehicle for spending," says Tony Hayes, who leads the payments industry division at the consulting firm Oliver Wyman.
U.S. government stimulus has delivered an immediate economic boost worth more than 9% of gross domestic product, according to economists at Brussels-based economic think tank Bruegel. That includes $1,200 checks sent to eligible adults, the extra $600 in weekly unemployment benefits, and $500 for dependent children.
The combination of state and federal unemployment benefits has meant that around two-thirds of U.S. workers who were laid off or furloughed are eligible to receive more in unemployment than they were earning on the job, according to a study by economists at the University of Chicago. The U.S. stimulus legislation also allowed people to defer payments on their federally backed mortgages for up to a year and most federal student loans through September. Those measures have given many Americans who were living for years with large credit-card balances extra funds to pay them down.
Alexis Smith, a residential-life administrator at a college in upstate New York, was furloughed from her job in March when the college sent students home. Ms. Smith, 24 years old, received $900 a week in unemployment benefits, or nearly twice her normal salary. She reported back to work last week.
The extra money gave her the opportunity to start paying the $10,000 in debt she had accumulated on multiple cards since she was a college student. She said she has paid off the balance on two cards, worth around $2,500.
"I'm not expecting to pay it all off. I'm just not using my credit cards anymore," she said. "I want to ensure my credit score is good."
In Europe, governments across the currency area launched major stimulus programs to support consumers during lockdown. These included grants to small-business owners, subsidies for companies to keep people on the payroll even if they weren't working and tax cuts.
Lenders of all stripes were expecting people to borrow more when lockdowns began.
"But exactly the opposite happened," said Stephan Goebel, who runs a chain of pawnshops in the working-class neighborhoods of Berlin. "People came in and retrieved their jewels, gold watches and other valuables."
U.S. pawnshops, which typically serve consumers with low or no credit scores, report that lending activity has fallen sharply, largely because of federal stimulus payments. Pawnshop borrowers have become buyers: Pawnshop sales of electronic equipment and other goods needed during lockdowns have surged.
"The federal government was quick to provide liquidity to people in our customer group," says David Ashe, who runs La Familia, a chain of 41 pawnshops in Florida and Puerto Rico.
People who have kept their jobs have also been paying off their credit cards. Without the chance to take expensive vacations, they have been left with more cash to cut credit-card balances that have been with them for years.
Geri McClean, a London-based chemical engineer for the oil-and-gas industry, racked up GBP10,000 ($12,600) in credit-card debt over the years, never having the spare cash to pay it down after spending on vacations and sending money back to her parents in Jamaica.
But now, blocked from traveling overseas, the 46-year-old recently paid off all the balances on her three credit cards. Still, the heavy blow the pandemic dealt to her industry has Ms. McClean worried. "It's a good time to be debt-free," Ms. McClean said, "because soon I won't have a career."
Write to Matthew Dalton at Matthew.Dalton@wsj.com and AnnaMaria Andriotis at firstname.lastname@example.org