COVID stimulus funds spurred lower debt spending

The Financial Health Network has published its 10th annual report Expense reportshowing the first-ever overall drop in interest and fee expenses.

The study tracks what U.S. households have spent on financial services during the pandemic and says the 4% drop in debt-related spending stems from the student debt moratorium, government stimulus measures and a decline in pandemic-related debt on credit cards.

Still, analysts said underserved populations pay a larger proportion of costs and spending is likely to rise as pandemic pressures ease this year.

“The last two years of the pandemic have been a financial roller coaster for people, often forcing them to recalibrate their lives and finances with each new development of COVID,” said Financial Health Network CEO Jennifer Tescher. .

“While we have seen a rare drop in overall spending on financial services in 2021, the confluence of rising consumer spending, the end of government handouts and rising inflation all point to rising fees and costs. interest for 2022; which will likely fall disproportionately on households that are already struggling financially.

Spending cuts won’t last

Analysis of year-over-year trends for more than two dozen financial products and services revealed a rare dip in overall spending. However, a disproportionate financial burden remains for underserved populations, which raises concerns with an increase predicted for the coming year.

Total interest and fees fell 4% to $305 billion from a 2020 high of $319 billion, mainly due to shifts in spending on credit cards and loans students. This year’s report found that households considered “not financially sound” accounted for 83% of all fees and interest paid:

Product Total costs in B
2020
Sum in B
2021
% cash
Fee account maintenance $5.0 $4.8 -4%
ATM fees $2.0 $2.3 +15%
Check cashing, non-banking $1.6 $1.5 -3%
International remittances $8.5 $8.9 +5%
Financial orders $0.9 $0.9 +2%
Discovered/NSF $11.4 $10.7 -6%
Prepaid cards $6.2 $7.2 +17%
TOTAL $35.4 $36.4 +3%
Table provided by Financial Health Network Study

Despite declines in overall spending, households with lower benefits continued to tend to borrow at a higher cost and pay interest at a higher cost.

Disaggregated by income, race and ethnicity, the disparities become apparent. As a percentage of their income, black households spent an average of 7% on fees, double what white households spent on interest 3%, while Latinx families spent 5% or 40% more than white households.

Low-to-moderate income households spent 8% of their income on fees and interest, more than double the higher income brackets that paid 3%.

Differentiated expenses according to the type of product: BNPL

After the BNPL rush that started in August, Financial Health Network saw a significant rise in the BNPL market. As of March 2022, consumers were paying about $1 billion in total interest to popular four-pay or other BNPL options.

By comparison, they estimated that households had a total balance of $95 billion in interest and fees on cards in 2021.

Financial Health Network found that BNPL users are disproportionately those who struggle with their financial health.

Based on their March BNPL Specific Brief, one in four BNPL users were financially vulnerable. Financial Health Network Score describes vulnerable populations as struggling with most or all aspects of their financial lives: nearly a quarter report having difficulty making payments.

The study also found that younger generations, like Gen Z, were looking for technology alternatives to credit cards: 20% of 18-25 year olds surveyed said they had used BNPL in the past 12 months.

Discovered

Overdraft and insufficient funds charges appear to have stabilized, totaling around $11 billion in 2020 and 2021. Recent analyst announcements regarding overdraft reform by several major banks could create positive changes in this market in 2022.

Overdraft fees

Bank of America, for example, announced that it would lower its fees to $10 on May 1. Chase lowered its fee to $34, just below Wells Fargo and TD Bank’s $35 fee and PNC’s $36 fee.

Meanwhile, many digital banks have dropped fees completely, such as Ally, Axos, Chime, Monzo, and Revolut.

The Financial Health Network found that black households with bank accounts were almost twice as likely as white households to report having paid at least one overdraft, while Latinx households were 1.5 times more likely.

Financially vulnerable households with bank accounts were about 10 times more likely to pay overdraft fees.

Bad news: credit card debt is back

The pandemic was heralded as a sea change in credit card debt in the United States, and the trend continued throughout 2021 until the last quarter, when repayment saw a record jump.

The WSJ found that from the February 2020 lockdown to June of that year, credit debt fell 10% in the United States as customers stayed in and saved.

Debt relief, pandemic stimulus, and deferred mortgage and student loans directly contributed to credit card repayments, down 10% in 2021, but only for a while. Last quarter’s surprise posted a red flag for financial health, the Financial Health Network said, and it approached pre-pandemic levels.

Based on New York Fed Macroeconomic Data Center released in February 2022, it was the largest increase in overall household debt since 2007.

“Overall credit card limits increased by $96 billion in the fourth quarter, and overall credit limits are now $160 billion above pre-pandemic levels,” the study found. fed. “Aggregate credit card account limits now stand at $4.06 trillion, up from $3.93 trillion in the first quarter of 2020,”

Student loans

Interest and fees on total federal student loans have fallen precipitously from approximately $25 billion in 2019 to $6.3 billion in 2021 due to the March 2020 moratorium. Unfortunately for student borrowers, the suspension ends on August 31, 2022.

Student loans suck

For every month the moratorium is extended, the study estimates that federal student loan borrowers avoid $1.5 billion in interest payments. Federal student loans account for 92% of the $1.7 trillion total; private student loan borrowers paid 30% more interest and fees in 2021 than federal student loan borrowers.

The good news: Pawnbrokers, paydays and securities loans have fallen

Financial Health Network found that interest and fees for alternative financial services dropped dramatically between 2019 and 2021: pledge revenues fell 25%, paydays fell 45%, and securities lending dropped by almost 40%.

Payday loans, in particular, have seen significant declines over the past year, with the percentage of households reporting use dropping from 5% in 2020 to 3% in 2021.

Black households, low-to-moderate income households, and financially vulnerable households all reported large declines in payday loan use.

“One of the reasons we are collaborating with the Financial Health Network is to further assess how households have managed their finances during the pandemic,” said Sarah Keh, vice president of inclusive solutions at Prudential.

“Access to affordable, high-quality financial services—particularly in terms of race, ethnicity, and income—provides data for researchers, policymakers, and advocates to track trends and identify opportunities to support more equitable financial health policies and products.”

Year in review

By the end of 2021, spending on several products was back to pre-pandemic averages. Credit card balances fell dramatically, but rebounded just in time for holiday spending. Installment loan balances also increased in the second half of 2021, as did overdraft fees.

The report found that; “If household spending continues to grow, interest rates rise as expected, and remaining government assistance ends as expected, we expect 2022 to see increased interest and overall fees on financial services. Households in financial difficulty are likely to feel these impacts more harshly. »

Methodology

It’s the spending report’s decade, but the second under a new methodology that combines research with a nationally representative survey of consumer spending. The survey of over 5,000 US-based adults was released in November 2021.

In conclusion, the Financial Health Network said that in 2022 it will be working on briefs that “take a closer look at products with particular implications for policymakers, financial service providers, and financial health in general.”

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