In last week’s blog post, I described our finding that 43% of consumers report they may run out of cash in October, November, or December of 2020. This week, using data gathered through our COVID-19 Financial Health Check, I make some predictions about which bills consumers will stop paying once the delinquency tsunami hits.
What does history tell us?
Many people in the country already find themselves unable to make all their required payments. Common wisdom holds that when facing reduced liquidity, consumers tend to prioritize shelter, food, utilities, and transportation—life’s staples. This, of course, spells bad news for creditors. Non-secured debt-obligations like credit card bills simply are not a priority if the choice is between that and paying for necessities.
Interestingly, the Great Recession of 2008 flipped this wisdom on its head. Rather than prioritize mortgage payments (shelter), a large number of delinquent consumers decided to protect their credit lines by staying up to date. A 2012 Transunion report describes this dynamic. In the graph below, one can see that when the depression hit, the ratio of consumers behind on their mortgage payments but up to date on their credit card payments increased dramatically. On the flip side, the percentage of consumers prioritizing mortgage payments over their credit card payments decreased substantially.
Considering the dynamics of the 2008 recession, these results are not entirely surprising. With the value of homes plummeting, fewer and fewer consumers were inclined to protect the asset underlying their mortgage. On the other hand, open credit card balances provided cash-strapped consumers some payment flexibility that, as evidenced by these results, was certainly worth protecting.
What will consumer prioritize in the age of COVID?
Here at RC, we were interested to understand how consumers might prioritize their bills in coming months. As part of our COVID-19 Financial Health Check—a free tool available for financial institutions to support their consumers’ recovery—we asked: which of the following bills would you sacrifice first if you were to run out of money today?
We found that childcare, utilities, mortgages, and car loans were the most protected categories. Consumers were most willing to sacrifice their credit card bill, student loan payments, and a third, surprising category: their food and grocery bill.
How should we understand these results? One interpretation is that consumers view portions of their food and grocery bills as discretionary spending. When short on cash, they might be willing to spend less on food, or perhaps reduce eating out—an affordable luxury in the time of COVID. This certainly makes sense, considering the overall reduction in credit card balances during the pandemic.
I was curious to see whether these priorities might shift among consumers in different financial circumstances. I divided up our population into two different categories: consumers who show signs of being financially vulnerable, and consumers who are financially stable. (This was done based on consumers’ responses to our so-called $2000 dollar question, a proven predictor of financial vulnerability.) The results showed that vulnerable consumers are more likely to stop paying their food/grocery bill than their credit cards!
This led me to look at the responses for consumers who anticipate running out of money in October, November, or December. The willingness to sacrifice food spiked up to 30%– 8 percentage points higher than credit cards.
It makes me wonder if perhaps the most vulnerable consumers realize, like they did in 2008, the benefit of keeping a credit card active.
Why does it matter?
The notion that different crises might spur different payment hierarchies has an important implication: could institutions help their own case, when consumers are making decisions about which bills to pay? With credit cards bills facing so much volatility, one would hope the answer is yes.
The credit agency Experian recently released a credit hierarchy report that found among unsecured debts, consumers put the highest priority on personal loans — ahead of both student and credit card loans. At first glance, I anticipate the difference is due largely to the requirement from loan providers that users sign up for autopay. Loans also have a clear end date, unlike credit balances. The team at LendingClub believes a big driver in their comparatively lower delinquency rates has to do with the way they treat their consumers. Rather than just offer a service or transaction, loan holders are given access to a set of personalized financial wellness tools. LendingClub believes these tools and their overall brand approach predisposes consumers to prioritize personal loans in their payment hierarchies.
How is your institution speaking to consumers at that crucial moment when they face tough decisions about which bills to prioritize? Our tool, BackOnTrack, guides users in early stage delinquency and encourages them to get up to date. We have found this approach not only delivers a better user experience—it also achieves higher rates of repayment. If you’re interested in hearing more, please get in touch!