Jobs lost, but personal debt paid down
Americans reduced more in credit card debt than nearly ever before
On paper, the Golden State appears to have escaped 2020 without a personal debt crisis.
Despite an unprecedented 2.4 million jobs lost in the spring, Californians joined fellow Americans in paying down interest-heavy debt such as credit card bills while acquiring wealth-building loans by taking out mortgages. In California, new mortgages jumped 10% even as real estate prices soared, suggesting an unexpected resistance to the prolonged pandemic.
Economists across the country aren’t seeing telltale signs of financial hardship in the Federal Reserve Bank of New York’s reports on consumer debt, in sharp contrast to the Great Recession’s devastating spikes in defaulted debt, bankruptcies and foreclosures. This time, they’re seeing near-record lows.
But looks can be deceiving. The large gains of well-off Californians may cloak the experiences of suffering segments in debt records not easily broken down by race, income or geography. Plus, millions of Californians suffering job losses have accumulated crippling debt that goes uncounted in national measures: unpaid rent, utility bills, borrowed money from loved ones and, in some cases, predatory loans.
“Once the dust settles, this is going to be a story of inequality,” said Matthew Harding, professor of economics and statistics at UC Irvine.
Economic downtowns usually trigger high levels of debt distress.
After the 2008 crisis, credit card debt spiked. So did the share of U.S. borrowers late on repayments. By late 2009, roughly 12% of American household debt was delinquent, the highest rate ever recorded.
Yet that’s not happening now, despite the U.S. losing more jobs in 2020 than were lost throughout the Great Recession.
Just 3.4% of Americans’ personal debt was delinquent by late September. California, one of the states hit hardest by Great Recession delinquencies, now has among the low
est rates, according to an interview with the Federal Reserve Bank of New York.
In another twist, U.S. credit card debt — considered an unhealthy form of debt because it doesn’t build wealth — dropped by $76 billion last spring, the steepest decline in the feds’ data.
That’s a sign Americans are spending less due to travel restrictions, business closures and lost income. It’s also due to active debt repayments. About half of Californians who received the latest round of stimulus checks reported mostly using them to pay off outstanding debt, according to January Census Bureau surveys.
How could a disease dubbed the “inequality virus” not generate alarming signs of household debt?
It may just be on hold. Federal cash infusions helped many pull through the year. California lawmakers barred evictions through June and Newsom banned water and electricity shutoffs during the pandemic.
“If the protections were extended permanently, then the data would align with reality,” said Taylor Nelms, senior director of research at Filene Research Institute, a nationwide think tank working with hundreds of credit unions.
An estimated 1.6 million California households are late on water payments. Estimates for the number late on rent range from 90,000 to 700,000.
Another reason why debt levels appear deceptively healthy is deepening inequality.
“When we worry about the averages, we miss a lot,” said Harding of UC Irvine.
For example, people with credit scores above 760, who tend to make more money, account for 85% of the national boom in new mortgage debt, while the mortgage balance among borrowers with scores below 620 declined.
For the mostly immigrant clients of the Mission Economic Development Agency, this is “probably the largest wealth stripping event of our lifetime,” said Ernesto Martinez, director of the nonprofit’s asset-building programs like financial coaching and job training. His team now scrambles to help clients hold on to “whatever little wealth” they had saved.
The federal reserve’s data also fails to measure some of the most distressing forms of debt, often affecting those who have gone months without assistance because they’re undocumented or had unemployment benefits frozen or delayed.
It doesn’t include mounting utilities and rental debt, nor the 14% of Californians who told the Census Bureau they borrowed money from loved ones in January.
It excludes people who turn to predatory financial services because they have limited or poor credit history.
Until recently, Erica Wood of San Diego had mostly dealt in cash, leaving the 44-year-old pharmacology researcher-turnedsmall-business-owner with little credit history.
The pandemic wiped out Wood’s booming mobile piercing business. Late on May’s rent, she turned to an online loan agency to take out a $4,000 title loan at a 400.87% annual interest rate, with her 2015 Lincoln MKZ as collateral. The pandemic’s end still seemed near; Wood figured she’d pay back the loan soon.
But the interest grew faster than she could repay it. Wood cashed out her 401(k), refinanced the loan, sold stocks and a prized classic truck. Two months late on repaying the title loan, she still owes about $4,300.
Though Wood’s financial crisis doesn’t show up in national debt statistics, her boyfriend’s relative success might soon. An electrician, his annual income increased from about $55,000 to over $80,000, as business boomed.
“He wants to buy a house now because the mortgage rates are so great,” Wood said. “But I’m freaking out.”