What next for US credit-card debt?

McKinsey 13 May 2020 12:00

Americans are experiencing firsthand the immediate humanitarian impacts of the COVID-19 pandemic. As of April 27, 2020, WHO reported nearly three million confirmed cases worldwide, with the United States in an unenviable leading position, with nearly one million. But the longer-term impact on US economic health is only beginning to come into focus.

Despite the US Congress–approved $2 trillion stimulus package, which included $350 billion in funding to help small businesses stay afloat over the next few months, the average US consumer will receive more modest assistance. Households in which adults earn less than $100,000 per year will receive, on average, around $3,000 to combat the effects of rising unemployment and economic hardship. By contrast, the average credit-card debt of households currently stands at around $8,400. 1 1. Matt Tatham, “2019 consumer credit review,” Experian, January 13, 2020,

The latest estimates from US Department of the Treasury Secretary Mnuchin predict the country’s unemployment rate rising as high as 20 percent in the coming year, while other forecasts include a worst-case scenario of more than 30 percent, 2 2. On the economy, “Back-of-the-envelope estimates of next quarter’s unemployment rate,” blog entry by Miguel Faria-e-Castro, March 24, 2020, well in excess of the 10 percent seen immediately after the recession in 2009. Inevitably, those worst affected will also be those least able to afford a shock to their monthly finances. Consequently, we expect consumers’ ability to service their credit-card debts to drop markedly with the rise in unemployment.

We have also witnessed proactive moves, including the following, from many lenders to self-regulate the adverse effects of collection activities on their customers:

3. Customer ability and willingness to pay

Multiple actions already announced in the media may reduce the likelihood that customers will be willing to pay down their credit-card debt:

The scale of unemployment across the United States will inevitably prove to be the biggest driver of customers’ ability to pay. However, lessons from the last recession also suggest that customers will make deliberate choices to prioritize servicing certain types of debt over others. In the last recession, customers prioritized unsecured debt obligations and chose to maintain credit-card and auto-loan payments (since they needed a vehicle to drive to work) in preference to making payments on secured debt, such as mortgages, which subsequently deepened the collapse of the housing market. 4 4. Matthew Komos et al., Payment hierarchy analysis: A study of changes in consumer payment prioritization from 2007 through 2011, TransUnion, 2012. Under current stay-at-home restrictions, we would expect this payment hierarchy to be reversed—customers may prioritize credit-card over auto-loan payments if they cannot leave home but need to make essential purchases, especially online.

In a best-case scenario, we expect the following:

Conversely, in a worst-case scenario, our expectations are as follows:

For each extreme, the key drivers of outcome appear to be the ability and willingness of customers to pay, given economic disruption and financial-stimulus support from the federal government, and the ability of lenders to adapt their operating models to ensure that customers remain engaged through the coming months. Exhibit 2 illustrates likely outcomes.

In scenario A, restrictions on the ability of lenders to engage with their customers leads to a rapid acceleration in losses, even if the economic shock of COVID-19 is relatively short lived and a federal stimulus package softens the impact for businesses and their employees. The degree and rate of adoption of a truly digital approach to customer engagement will play a major role in separating well- from underperforming financial institutions.

Horizon two: The next few months

As the flow of inbound enquiries from customers inevitably begins to wane, lenders will want to shift the allocation of their customer-assistance capacity and create specialized assistance teams trained to help newly delinquent customers with new solutions as the effects of economic hardship intensify.

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USUS Department of the TreasurySecretary Mnuchin
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