In March 2020, with the outbreak of COVID-19 in the United States, the number of confirmed cases rose from less than 100 per day at the start of the month to more than 10,000 per day at the end of the month. This had a serious impact on the US economy and employment. For example, the stock market and consumer credit fell sharply. In April 2020, the US Consumer Financial Protection Bureau issued a special research report on The Early Effects of The Covid-19 Pandemic on Credit Applications, which analyzed the impact of the COVID-19 pandemic on consumer credit applications. This article provides an interpretation of that report’s findings.
Hard credit inquiries by consumers reflect consumer credit demand. Looking at the difference between the actual number of consumers credit inquiries and the expected number of inquiries can provide an estimate of the change of consumer credit demand. Based on this data, the report found that: (1) all kinds of consumer loan products underwent a massive decline in demand. Auto loans fell the most (52.4%), followed by credit card (39.7%) and housing loan inquiries (26.9%);
(2) Consumers with different credit levels were affected differently. Interestingly, consumers with the highest credit ratings rely the least on consumer credit and experienced the greatest decline in demand for credit. Consumers with the near-prime credit level are more dependent on consumer credit, and their decline in demand was the least.
(3) There is a negative correlation between the decline of consumer credit and the severity of the epidemic. The more severely affected the region, the more severe the decline in consumer credit. The correlation coefficients between the decrease of auto loan and house loan and the severity of the epidemic were -0.47 and -0.53, respectively.
(4) The decline of consumer credit is also negatively correlated with the unemployment rate. The higher the unemployment rate, the more consumer credit falls. The correlation coefficients between the decrease of auto loan and housing loan and the severity of the epidemic reached -0.60 and -0.37, respectively.
The decline in consumer credit may come from both consumer demand and the tightening of supply by credit institutions. As COVID-19 increased uncertainty about future earnings, consumers reduced spending and demand for consumer credit fell. The most obvious is that consumers with the highest credit ratings, who are the least dependent on consumer credit, showed the greatest decline in demand for credit. Subprime consumers who are more dependent on consumer credit showed the least decline in credit demand. Lenders' worries about consumers' ability to repay their debts in the future is also likely to reduce the supply of consumer credit. The relationship between the severity of the epidemic, unemployment and falling demand for credit supports this view.
Product characteristics also partly explain the decline in consumer credit. Cars are more reliant on offline sales and have higher payouts, leading to the sharpest fall in credit. Credit cards, a tool for smoothing consumer spending, fell by the same amount during the epidemic, except for those with the best credit. Homes, which cost more but take longer to make a purchase decision, fell the least.
Consumer credit in China was also affected by the serious pandemic outbreaks. During the first quarter of 2020, net profit for home credit consumer finance fell 90% in China. Analyzing the impact of COVID-19 in the United States on consumer credit could help us understand how the pandemic has affected consumer credit markets.
