Older Americans Faced Early Pandemic Credit Constraints
Research by Meta Brown, J. Michael Collins and Stephanie Moulton offers insights into what happened to consumer credit for different age groups early in the pandemic. The authors do this by looking at Experian credit bureau data on different types of traditional credit (e.g., student loans and mortgages), as well as alternative financial services (e.g., payday loans). They found that:
- While younger adults saw debt levels increase in 2020 relative to 2019, older Americans saw debt levels decrease.
- Reduced spending and debt repayment likely helped lower older Americans’ debt. However, another important mechanism appears to have been reduced credit supply: Older Americans saw their existing credit curtailed and new credit denied at relatively greater rates.
- Despite reduced access to traditional credit, it doesn’t appear that older borrowers increased their use of alternative financial services (e.g., payday loans), and debt accommodations (e.g., forbearance) were less common among this group.
- There is evidence of a K-shaped recovery among older Americans, where advantaged households had relatively lower levels of debt during the early pandemic and disadvantaged households saw relatively higher levels of debt.
This working paper represents preliminary research that is being circulated for discussion purposes. The views expressed in this paper are solely those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of St. Louis or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.
Early in the pandemic, older Americans experienced reductions in debt relative to their younger peers. Sheltering from a virus that had particularly lethal effects on their age group instead of traveling and dining out likely reduced consumption, contributing to greater slack in household budgets and the opportunity to repay debt. However, during this time older consumers also had greater difficulty obtaining credit, especially new credit.
We found from an analysis of Experian credit bureau data that in 2020 new credit approval rates fell between 9.8 percentage points and 13.5 percentage points for those ages 50 to 71, when compared with the year before. Exacerbating things, existing accounts (e.g., credit cards) were limited or closed at a greater rate: Credit line reductions increased by 5.2 percentage points to 5.5 percentage points across the same age group.
Older Consumers Experienced Debt Reductions as the Pandemic Transformed the Economy
It is important to note that debt is not inherently good or bad; it allows consumers to finance purchases they might otherwise not be able to afford, such as a house or car, and to pay for expenses on credit when savings or income is not sufficient. When borrowers are unable to keep up with their debt payments—which may lead to delinquency or default—debt tips from being a helpful form of liquidity to a harmful drag on household finances.
While younger adults (ages 18 to 49) experienced increased debt levels in 2020 relative to 2019, older Americans experienced reduced debt levels during this period. Circumstances, of course, varied by individual: Some younger adults reduced debt, while quite a few older adults increased theirs. Socioeconomic status mattered as well: Older adults with higher incomes and credit scores reduced debt more than their peers with lower incomes and credit scores. The general pattern, however, was of declining balances among older Americans, especially for mortgage loans.
Creditors Cut Back on New and Existing Credit as Risks Mounted
So, what was behind reductions in debt? Falling debt balances among older Americans were likely due in part to reduced consumption and continued or accelerated debt repayment, since older Americans were not spending as much on travel, restaurants and entertainment as they were before the pandemic. But the data reveal an additional mechanism for debt reduction: reduced supply. Namely, credit lines were closed and credit limits were lowered. In 2019, prior to the pandemic, about a quarter of borrowers under 50 experienced involuntary reductions to their credit. Older borrowers experienced cuts more frequently: In 2019, a third of borrowers ages 50 to 71 saw their credit decline. During 2020, these involuntary cuts became more common, especially for older borrowers.
Other factors intensified the credit pinch for older consumers. For instance, those with higher incomes, moderate credit scores and more debt relative to their incomes had a higher likelihood of experiencing a cut to existing credit. To their lenders, these consumers may have seemed like an increased financial risk given their vulnerability to life-threatening complications from COVID-19. At the same time, some lenders may have viewed young borrowers as relatively good bets, despite their increased risk of job loss during the COVID-19 recession.
In addition to restrictions on existing credit, the approval rate for new credit—approximated by the number of new credit lines opened as a share of total inquiries—fell early in the pandemic across all age groups. However, new credit approval rates decreased more for older adults. Compared with 2019, approval rates in 2020 fell:
- 5 percentage points, from 62.3% to 57.3%, for those under 50
- 11.5 percentage points, from 73.7% to 62.2%, for those ages 62 to 66
- 13.5 percentage points, from 75.2% to 61.7%, for those ages 67 to 71
- 13.6 percentage points, from 71.5% to 57.9%, for those 72 and older
New Credit Approvals Fell Early in the Pandemic, Especially for Older Consumers
SOURCES: Experian National Data Sample 2019-20 and authors’ calculations.
In sum, access to credit became more constrained in 2020, especially for older Americans, both from involuntary cuts to existing credit and, among those seeking new credit, a lower likelihood of obtaining it. Banks and other financial institutions often consider older consumers to be attractive borrowers. They tend to repay loans on time and have assets, such as homes and savings, from which to draw. Yet economic uncertainty in the early part of the pandemic appeared to restrict this group’s access to credit.
When it gets harder to find a loan, alternative financial services (such as payday or title loans) often become more popular. Surprisingly, the rate of individuals seeking these other types of credit fell early in the pandemic. Inquiries declined more for lower-income borrowers (who are typically more likely to seek alternative credit) and even more for older low-income consumers. Inquiries also fell among those with low credit scores and a high debt-to-income ratio, another group of borrowers who typically are more likely to turn to alternative financial services. Thus, there is little evidence of older households turning to alternative credit sources after finding traditional forms of credit harder to come by. This could be an indication that the unprecedented generosity of social safety net and debt relief programs in response to the pandemic helped meet consumers’ need for liquidity—at least in the short term.
Consumer Debt Relief Benefited Younger Borrowers, Didn’t Address Older Borrowers’ Constraints
As the pandemic caused turmoil within the economy, creditors quickly extended lifelines to borrowers to help them avoid default. Some accommodations let borrowers put off payments on their loans for some time. As a result, delinquency rates declined across all age groups and loan types, despite the crisis.
We observed that the share of consumers with debt accommodations was lower at older ages. This is driven in part by student loans, given that younger people are more likely to have them and that the vast majority of student loans were automatically put in forbearance. However, older consumers also received fewer accommodations for other types of loans. We also observed that accommodations were more common among those with the highest income and the lowest credit scores (under 580)—a group of consumers more likely to hold debt, but also with a history of difficulty repaying it. Accommodations were also more common among mortgage holders, residents of predominantly Black neighborhoods, and those with high levels of debt relative to their incomes.
Older consumers were much less likely to have debt accommodations. While the rate of delinquency fell considerably for younger borrowers in the first quarter of 2020, the rate for older borrowers barely moved. As mentioned earlier, older borrowers, in general, are more likely to make timely payments and, thus, are less likely to be delinquent. In contrast, younger borrowers have more trouble repaying debt and generally stand to gain more from debt relief.
Delinquency rates moved closer together for younger and older consumers over the course of 2020. Consumer debt relief for younger borrowers struggling with repayment provided meaningful credit healing. In contrast, that relief did little for the pandemic-era credit access issues facing older borrowers.
K-Shaped Debt Recovery Evident for Advantaged and Disadvantaged Older Consumers
Overall, older adults experienced reduced debt levels during the early pandemic. However, debt reduction was more substantial among older people with higher incomes and better credit, especially those with a mortgage, many of whom continued to make payments over 2020. In contrast, individuals with lower incomes, lower credit scores and without mortgages tended to increase their debt balances over 2020. This provides evidence of a K-shaped recovery—which occurs when different parts of the population recover from a recession at different paces—among older Americans. In this case, advantaged households (higher income, good credit, homeowners) experienced relatively lower levels of debt over the course of the early pandemic, while disadvantaged households (lower income, poor credit, nonhomeowners) experienced increased debt levels.
An important part of the decline in those debt holdings, especially among older Americans, appears to be driven by lenders pulling back: Inquiries for new credit resulted in fewer opened accounts, and existing credit lines were either involuntarily reduced or cut off altogether at a greater rate.
Implications of the Early Pandemic Experience
Debt relief has been particularly helpful for younger and disadvantaged borrowers to avoid financial hardship in the form of delinquency and default. However, it is unclear how these borrowers will fare when these accommodations expire. Additionally, the credit squeeze on older consumers broke from a trend in which these borrowers tended to see increasing credit availability. It remains to be seen if the credit conditions facing older Americans will continue or if the risks that creditors perceive have changed as the pandemic has evolved.