Yvonne Whittaker was living her dream as 2020 began.

She moved back to Colorado in January. She found a great apartment and later got hired as a bartender and server at a new restaurant featuring craft beer brewing – an industry in which Whittaker, 33, plans a career.

“I thought ‘I have this job … I’m set,’ ” Whittaker said. “ ‘It’s going to be good, and I am not going to have to worry about finances.’ And then, all of this happened.”

Whittaker’s employer – Ska Street Brewstillery in Boulder – was opened to the public exactly one hour and 11 minutes on March 16 before being shuttered by a statewide COVID-19 lockdown.

Whittaker lived on unemployment until Ska Street reopened in early June. Even with a job, making ends meet proved to be a struggle. She had rent and utilities to pay, groceries to buy, and a credit card payment to make.

“Some weeks I would count my money at the end of the day and say, ‘Oh, I might actually be able to pay all my bills this month’,” Whittaker said. “And then other weeks almost no one came into the restaurant because they didn’t feel comfortable going out.”

Whittaker kept a strict budget and bought only necessities. Even so, to get by, she found herself maxed out on credit cards and making a difficult decision to withdraw money from her individual retirement account.

“I didn’t realize it was going to be that bad,” Whittaker said.

Individual financial hardships caused by the pandemic have been vast, but for some the burden has been heavier, according to a Federal Reserve research paper published in September. “Household Financial Distress and the Burden of Aggregate Shocks” examines a fact that Whittaker and countless others have been facing: The coronavirus pandemic has disproportionately hurt certain individuals, much like the 2007-09 recession.

“In both of these cases it appears that people in greater financial distress are being hurt the most,” said José Mustre-del-Río, research and policy officer at the Federal Reserve Bank of Kansas City. Mustre-del-Río co-authored the research paper with Federal Reserve System colleagues Kartik Athreya, Ryan Mather and Juan M. Sanchez.

Their study found that the pandemic – like the 2007-09 recession – did not affect individuals uniformly. Simply put, individuals with debt going into an economic recession can be greatly affected when the downturn takes hold.

“It is very clear that what we are calling financial distress is something quite prevalent,” Mustre-del-Río said. “There is a large share of individuals who at any point in time are delinquent on their credit cards or reaching their maximum level on their credit cards.”

The economists centered on credit card debt partly because so many individuals have access to such credit lines, and an individual can become delinquent without immediate consequences like repossession of a car or home.

“You can have collection offices calling you or mailing you, but it is kind of hard for them to take away anything from you immediately,” Mustre-del-Río said.

“That is a part of the reason why people actually become delinquent on credit card debt. That short-term loss or cost doesn’t appear to be that big.”

The Federal Reserve’s research paper stated that the households hardest hit in the 2007-09 recession were not diversified, in that they had a larger share of net wealth in their homes.

“Then what you would see there is areas of greater financial distress were the same areas the largest decline in home values,” Mustre-del-Río said.

“If you look at the initial information and data we have from the COVID-19 recession it looks like the earnings or employment losses associated with this pandemic are also falling disproportionately in areas of higher financial distress.”

More specifically, the data revealed that people with higher financial distress work in the leisure and hospitality sector.

Mustre-del-Río said the overarching theme is that even though the 2007-09 recession and the COVID-19 recession are two very different events with different economic shocks it appears that those most affected are individuals with greater financial distress.

And those with financial distress will likely change how they consume.

A big shift in behavior

Because of the pandemic, things certainly changed for Melissa Pond, a full-time student who works Sundays as a barista in Denver.

“I definitely have seen a drastic difference in how I live my life; it’s a lot more reserved,” Pond said. Though she has kept her eight-hour shift, wages from tips have fallen from about $20 an hour before COVID-19 to about $5. “I am penny-pinching any way I can. I make lists to decide what I am going to buy for groceries. And instead of making a new meal every night, I am making one big meal to last the rest of the week.”

The pandemic’s effect on Colorado’s leisure and hospitality sector was chilling in 2020. In January, the state’s unemployment rate was 2.5%, with about 345,000 people working in the state’s leisure and hospitality sector, according to the U.S. Bureau of Labor Statistics. In April, the state’s unemployment rate swelled to 12.2%. There were only 184,000 Coloradoans working in leisure and hospitality in April, a sharp drop of 46.3% from a year earlier. That decline was more than double the drop in any other sector.

That sharp decline rippled out to consumption.

Sales tax revenue was slightly less than $7 billion in April, compared with almost $8.6 billion in April 2019, according to the Colorado Department of Revenue. Tax revenue in the state’s category of Food Services and Drinking Places dropped from $1 billion in April 2019 to just under $500 million in April 2020. And tax revenue in Colorado for clothing and clothing accessories stores fell from $289 million in April 2019 to $88.7 million in April 2020.

Many people left the leisure and hospitality sector altogether in 2020, said Liddy Romero, executive director of WorkLife Partnership, a Denver nonprofit organization, and a member of the Kansas City Fed’s Community Development Advisory Council. Certainly, efforts like the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) helped workers, Romero said. But, she added, so many people were simply trying to survive with no ability to pay credit card debt.

Indeed, credit card debt did enlarge for many for that very reason during the pandemic, said Thea Garon, senior director, program, at the Financial Health Network, a nonprofit financial services consultancy in Chicago. Garon said her organization’s research and data collected in August 2020 concluded people with higher levels of debt had higher financial stress and hardship in the pandemic.

“People who report unmanageable levels of debt were also significantly more likely to say they experienced other forms of financial hardship since the beginning of the pandemic in March, including struggling to put food on the table, keep a roof over their heads, and afford necessary health care, “ Garon said. “At the same time, many people have turned to their credit cards to make ends meet during the pandemic.”

Further, Garon said her organization’s research shows that individuals with low incomes have been more likely than those with high incomes to say they reduced their spending and drew down on their savings to make ends meet.

“This is likely due to the fact that lower-income Americans are bearing the brunt of the COVID-19 economic crisis, which has led to disproportionate job losses in the sectors of leisure, hospitality, entertainment and travel,” Garon said.

Finding a path toward stability

Angie Gumminger has experienced that situation.

Gumminger drives a bus for a Kansas City area school district. Work was steady for her until spring break in March. Then on-site classes were halted, as well as the use of school buses. She was paid, but what Gumminger needed was the extra pay she earned driving buses for such activities as field trips, summer school and taking athletes to sporting events.

“With my base pay I am able to pay rent, the car payments and utilities—but that’s about it,” she said.

Gumminger knows financial distress and its consequences quite well from the 2007-09 recession.

Gumminger said her ex-husband had a difficult time finding a job when he returned from contract work in Iraq, she said. Things turned from bad to worse. They lost their home in foreclosure. Gumminger filed for bankruptcy in 2011.

By 2020, before COVID-19, she was in better financial shape, although she had loans to pay.

“I haven’t had a credit card in about 10 years,” she said. “I seem to get into trouble with them. I would max them out and be unable to pay. It’s very stressful. They want their money, and you know you don’t have it. I fear that.”

To help, Gumminger sought help and advice from Rachel Barker, vice president for financial coaching at Community Services League, a nonprofit organization in Independence, Missouri. Barker said credit card debt is a real danger for people trying to stabilize their finances.

“Credit cards are often one of the last things to be paid once you have stretched every dollar,” Barker said. “Paying the minimum payments doesn’t do very much. At some point, people realized that.”

Barker works with individuals to resume a healthy relationship with credit cards because that is what is needed if someone wants to buy a home.

“We see credit cards as a credit-building tool,” Barker said. “We coach on how to use credit cards to your advantage when you can pay on time and keep balances low.”

That’s exactly what Gumminger wanted—an improved credit score so she could refinance her car loan and, ultimately, own a home again.
Gumminger’s circumstances from the 2008 financial crisis and the COVID-19 recession illustrate some of the findings explored in the Federal Reserve research paper.

“It shows how things spiral out of control and financial distress can ultimately lead to bankruptcy,” Mustre-del-Río said. “Importantly, it is not clear that bankruptcy makes everything better as sometimes people get right back into financial distress because the reasons that led them down the path didn’t vanish. On the flip side, it is great to hear that she is working with a financial manager, because it does seem that this kind of intervention can be really key to breaking the cycle of financial distress.”