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In 2020, Americans have paid off a large chunk of their credit card debt. Indeed, according to data from New York Federal Reserve, the total outstanding credit card balance fell $ 108 billion from the end of 2019.
This is the largest annual decrease in the total credit card debt since the Federal Reserve started recording this data point in 1999.
Fed data shows Americans, on the whole, are reducing their balances rather than taking out new loans. Indeed, the number of people apply for new credit cards has declined since the second quarter of 2020, when the COVID-19 pandemic in earnest in the United States
There has been a lot of bad news this year. But the fact that Americans are making great strides in paying off credit cards is a bright spot.
Here’s what you need to know about the sharp decline in outstanding credit card debt
The Federal Reserve has a simple explanation for why Americans were so successful at paying off their credit cards in 2020: there just wasn’t much to spend the money on.
The sharp reduction in card balances began in the second quarter when the total fell by $ 76 billion. It continued into the third quarter when outstanding card balances declined by $ 10 billion. There was a small seasonal adjustment upward in the fourth quarter, but the Federal Reserve reports that people are still not spending much.
This also makes a lot of sense. After all, in the face of the economic uncertainty of a pandemic, it’s natural to prepare for a possible loss of income or unforeseen expenses. Paying off credit card debt is one of the best ways to do this because you can get rid of a monthly obligation and save on interest charges if you bring your card balance down to $ 0.
Americans can continue this positive trend
2020 has been an unprecedented year and it’s a year most of us wouldn’t want to repeat. The reason many people were able to repay their debts was that they couldn’t travel or eat out because of COVID-19. But most of us will want to get on with our normal lives and resume these activities once it is safe to do so. However, that doesn’t mean that you can’t keep improving your finances.
If you were successful in paying off all of your debts during the pandemic year, your financial situation should already be much better in the future. After all, you won’t have to pay interest on loans anymore and you won’t have to worry about monthly payments. The money you spent on debt before the pandemic can be reallocated to other purposes, like building a emergency fund or save for retirement.
If you haven’t fully paid off your high-interest debt yet, it may be worth continuing to forgo expensive trips or dining out until your balance hits $ 0. After all, the habit has been broken now. Sacrificing a little longer can be worth getting rid of debt.
Spend in moderation
If your spending habits changed during the pandemic, you might decide to reintroduce the splurge in moderation. You don’t have to spend at the pre-pandemic level. After all, if you haven’t been able to dine out at all, you will already be happy to eat out once or twice a month instead of every week.
If you can avoid resuming all the expenses you did before COVID-19, you can continue to use the money freed up by your new habits wisely. This may be one of the few silver liners from a rough and depressing year, so it’s worth some serious consideration.
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