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The Pandemic Is Pushing Americans Deeper Into Credit Card Debt —  How That Could Take a Toll on Retail

Millions of Americans are racking up more credit card debt as the COVID-19 pandemic continues to impact their finances — and that could be bad news for the already-battered retail sector.

According to a recently published survey from CreditCards.com, 51% of Americans have accrued even more debt on their credit cards amid the health crisis. It represents a significant uptick from a poll the site conducted back in May, when 23% of U.S. adults who already had credit card debt added even more to it.

The data revealed that nearly half of those respondents — or 44% of people — specifically blame the health crisis for their worsening financial states.

Since it took hold in the United States roughly 10 months ago, the coronavirus outbreak has dealt an unprecedented blow to retailers and led to temporary (and sometimes permanent) store shutdowns as well as mass layoffs and furloughs. Many Americans are still struggling to keep up as the country faces historically high levels of unemployment. Some, who are living paycheck to paycheck, may be forced to use their credit cards to cover monthly expenses, potentially pushing them further into debt.

“Credit card debt can either be a sign of confidence or a sign of financial trouble,” said Matt Schulz, chief credit analyst at LendingTree. “We’re seeing a little bit of both right now because you have some people who are flush with cash and others who are hit hard by the pandemic. [The latter] are racking up credit card debts because they don’t have any other choice in terms of making ends meet.”

Gender, generation and geography

The CreditCards.com poll showed that debt can vary widely depending on gender, generation and geography.

Consumers living in regions like the Northeast and the West Coast can generally expect to pay higher than average prices for housing and utilities, among other costs. Such expenses have only worsened over the past year for millions of people — many of whom might’ve relied on credit cards to pay their monthly bills.

What’s more, a greater number of women versus men appear to be exiting the workforce — putting at risk their ability to meet basic living costs and potentially leading them down a financial rabbit hole. In the last jobs report of 2020, for instance, the Department of Labor reported that the U.S. economy lost 140,000 jobs — all of them held by women.

CreditCards.com also found that millennials were struggling to pay off their credit cards more than any other generation; 56% have gone “more deeply into debt” since March, and 55% of those respondents attributed the fiscal strain to the pandemic. (Overall, it noted that 70% of adults have personal debt of some kind and that 48% of baby boomers, 47% of Gen Xers and 33% of millennials carry credit card debt.)

The case for stimulus payments

CreditCards.com shared that 63% of debtors said a lack of additional stimulus from the government could affect their ability to make minimum credit card payments in the short term. That said, the survey was conducted in mid-December — just before congressional leaders and the White House signed into law a $900 billion COVID-19 relief measure that promised $600 in one-time direct payments to individuals as well as an additional $300 a week for the unemployed through March 14.

Still, consumers have competing financial priorities: Some might opt to pay off their credit cards, others might be focused on building on an emergency fund and a number of them might simply be making ends meet.

Back in June, following the rollout of the $1,200 stimulus checks, the U.S. Census Bureau found that just over a third of households with incomes between $75,000 and $99,999 were “more likely to use their stimulus payments to pay off debt or to add to savings,” compared with households overall. In contrast, nearly 88% of households with incomes of $25,000 or less planned to spend their stimulus checks on living expenses.

In that same report, the Census Bureau noted that, in the households that spent their stimulus funds, about four-fifths of respondents used them on food, while 77.9% put the money toward rent and utilities. More than half — or 58% — of them used the money on household supplies and personal care products. Separately, only about a fifth said they spent the money on apparel, and a smaller share — or 8.1% — of people said they used the payments to buy electronics, furniture and appliances or recreational goods like fitness equipment, toys and games.

Because the majority of people are focused on slashing credit card debts and spending on basic living necessities, some experts suggest that money isn’t flowing into the economy. So while it’s ultimately favorable for our finances, the act of paying off credit card debt could inadvertently stifle economic growth.

So how can retailers win?

That’s not to say there isn’t a silver lining: In recent years, services like “buy now, pay later” have emerged as a popular means to fund some of their discretionary purchases or afford bigger-ticket items while sidestepping high credit card interest rates. These options — offered by companies like Afterpay, Klarna and Sezzle — are also free of interest and allow customers greater flexibility to continue to shop at a time of financial strain.

According to experts, such payment installment plans can help consumers manage their finances without saddling them with more credit card debt. They can also enable shoppers to take better ownership of their expenses even as they make feel-good and aspirational buys as the pandemic rages on and keeps them indoors.

However, some caution that such services are not a long-term solution on either side of the equation.

“Retailers operate best when there is a robust consumer market, [and] ‘buy now, pay later’ creates a short-term help during a very trying time,” said Nikki Baird, VP of retail innovation at Aptos. “But if it gets out of control or there isn’t enough financial transparency to consumers … then it could hurt consumers and retail in the long run. Buy now is great, but it does need to be paid later, one way or another.”

What’s more, according to Dara Busch, president of consumer practice at 5WPR, many Americans with the means to do so (i.e. they’re not saddled with debt or already have sizable savings) are actually more willing than ever to splurge on pricey discretionary items — like clothing, shoes and jewelry —  seeing it as a replacement for other activities such as travel and dining out, which are now restricted.

“People are splurging to feel good because, right now, there’s a lot they can’t do,” said Busch. “They’re rewarding themselves by making purchases, whether it’s for the home or for their wardrobes.”

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