6 ways 2020 was a bad year for credit cards

The COVID-19 pandemic of 2020 saw some businesses become big winners — such as Zoom, Home Depot and payments companies like PayPal — while other businesses suffered heavily, most notably the travel and hospitality industries. Credit card issuers also suffered, as demand lagged heavily for new cards and their overall spending dropped considerably during the year.

“Consumers were averse to adding more debt, and lockdowns that put the kibosh on travel diluted the appeal of getting a new rewards card,” said Greg McBride, chief financial analyst at Bankrate.com. “Also, issuers’ tightened credit and approval rates declined for applicants with weaker credit. Whether this demand shift is temporary or permanent will depend on how issuers respond, and their success in appealing specifically to younger, would-be cardholders. But the threat to share of spend and receivables is real.”

An important factor in acquiring a new credit card and being able to pay any bills that are generated from it is the ability to service the debt — something many consumers struggled with during the COVID-19 pandemic. The virus impacted the overall economy, ultimately leading to significant unemployment, curtailment of working shifts and lower demand, putting consumers on their back feet.

Based on data from the Pew Research Center, one third (33%) of consumers were forced to dip into their savings or retirement funds to pay everyday bills. This was most acute in lower and middle-income groups than it was among high-income consumers. About 40% of Black and 43% of Hispanic consumers reported having to use existing savings to pay bills, compared to just 29% of white consumers.

While 46% of lower-income and 19% of middle-income respondents reported having trouble paying bills during the crisis, only 5% of higher-income consumers reported the same level of difficulty. Perhaps the most telling signal was the need to visit a food bank to put dinner on the table, as fully 35% of lower-income and 12% of middle-income respondents reported having done so since the crisis began, compared to just 1% of higher-income consumers.

While higher-income consumers appeared to be least financially troubled, they also account for only about 18% of the population according to Pew’s methodology. In other words, the pool of available prospects was reduced, as a result of COVID-19, to those who least needed credit and had the greatest ability to shop around for a new card.
Vacations are often a big driver of new credit card acquisition and spending. Travel reward cards entice consumers with the ability to earn air miles for future travel as well as access perks for imminent travel such as free lounge access, Uber rides, seat upgrades and more.

Unfortunately for the travel industry, early in the pandemic airlines were deemed to be a major vector in the spread of the virus and consumers and companies cancelled both leisure and business travel. According to the Transportation Security Administration (TSA) the shift began in mid-March, concurrent with the U.S. national emergency declaration, resulting in just 35 million passengers passing through TSA checkpoints compared to 72.7 million in March 2019, roughly a 50% drop. The biggest drop came in April with just 3.3 million people traveling compared to 70.1 million in April 2019 — a drop of 95%.

Despite enhanced cleanings, mask requirements, social distancing, temperature screenings and more, travel has still not returned to 2019 levels. December, the strongest month since the crisis began, saw 26.4 million people travel, or about 37.6% of the same month's volume in 2019.

The travel bans and restrictions, along with consumer fears of contracting the virus while traveling, impaired travel reward card demand. The Wall Street Journal reported that issuers of major travel cards had to scramble just to keep existing cardholders happy, with reductions in annual fees and extra rewards for groceries.

“Travel cards didn’t carry the same appeal to cardholders initially, but then issuers quickly tweaked category bonuses, payout ratios, and expanded the options for redeeming travel credits in order to adapt,” noted McBride.
Cancellations, closures and restrictions, along with lockdowns and capacity limits on a wide variety of activities including sporting events, movie theatres, restaurants, or simply going to the shopping mall, meant many consumers had little opportunity to spend money. How and when consumers could spend money changed dramatically in 2020.

When events did come back, fans were left out. The NHL Stanley Cup and MLB World Series both played to venues without fans. Movies came back only to be streamed in homes instead of packed theaters.

The net result was that with fewer opportunities to spend money, more consumers began to save substantial amounts of money. Based on data from the Federal Reserve Bank of St. Louis, consumers saved at historic levels, reaching 33% of their disposable income in April of 2020. As a reference, the highest savings rate in the last 60 years recorded by the Federal Reserve was 17.3% in May 1975, when the prime rate was 7.4%.
As consumers had less opportunity to spend money, the demand and willingness to increase revolving balances fell as well.

“More significant was the focus many consumers had on paying down debt, and aversion to incurring more. A lot of spend went on debit cards instead,” noted McBride.

According to the Federal Reserve G.19 Credit Report released on December 7, 2020, at the end of October revolving credit balances had fallen to $979.6 billion, down by over $114 billion from the peak of $1,094.2 billion at the end of 2019. This level of revolving credit balances is now approaching 2016 levels.

Another factor limiting increasing balances was that banks began cutting consumer credit limits early on during the pandemic. Discover announced it was cutting credit limits on its customers’ cards just one day after retail card giant Synchrony reported it was reducing credit lines to limit its risk exposures.

Further, American Banker reported in June that banks were cutting back on 0% interest rate balance transfer, leaving those with a balance few options other than to pay off the debt or begin servicing it at higher interest rates.
According to data from Equifax’s Weekly U.S. National Consumer Credit Trends December 15, 2020 report, demand for new credit cards has remained at about 50-60% of 2019 levels for most of the year. Demand even dipped below the 50% level in April, when the nation was waking up to the full extent of the pandemic.

While news of vaccine breakthroughs began to surface in the fall, consumer credit card demand has remained muted. This may be influenced, in part, by the rise of virus infections across the globe, resulting in new lockdowns and restrictions, thereby limiting spending opportunities. However, the longer-term outlook is not so bleak, and potentially could represent a strong upside swing.

“Widespread vaccinations are likely to unleash a ton of pent-up demand in the areas of travel and entertainment in particular,” said McBride. “Issuers will respond by competing for share of spend among the upper-income, strong credit, high-volume spending crowd by tweaking offers and bringing new offers to market.”
There has been one product category that has acted to take the appeal of credit away from traditional credit cards during the pandemic – buy now, pay later (BNPL) services. This is especially true for BNPL products that split a purchase in three or four payments spread over successive two-week periods that match a consumer’s paycheck flow. One leader in this space has been the Australian firm Afterpay, which has expanded outside of its home territory of Australia and New Zealand (ANZ) to reach the U.S. and U.K. in the last few years.

According to Afterpay Ltdfinancial reports, the company has seen its active U.S. customer base skyrocket during the pandemic, adding almost three million active customers between December 2019 and September 2020. During the October-December 2020 holiday shopping period, Afterpay reported that its average purchase basket (transaction) size increased by 30% compared to the same time period in 2019.

“The aversion to debt among younger consumers — millennials and Gen Z — is fueling much of the growth in the buy now, pay later space,” said McBride.

It is the two younger generations that find BNPL products most appealing as alternatives to credit cards. Based on data from the PaymentsSource Future of Money study, 48% of Gen Z and 56% of millennials said that having access to a free or low-cost BNPL service was very important or critical for them to enable purchases online or in stores.