American credit card balances saw a 'remarkable' drop in the first quarter of 2021, according to newly published New York Fed data, while student loan debt kept rising despite a payment and interest pause.

"One of the most confounding changes in debt balances is that of credit cards," the NY Fed said in a press release. "In the first quarter of 2021, balances shrunk by $49 billion, the second largest decline in the history of the time series, which begins in 1999. ... the decline in the first quarter of 2021 is remarkable because it stands in sharp contrast to the recovery underway in the retail sector as the U.S. economy reopens and travel resumes. In any case, it appears that many households are working to reduce their revolving debt balances, and this is happening across the board."

The massive drop in credit card balances followed an even steeper fall of $76 billion in the second quarter of 2020 amid the lockdowns imposed to contain the spread of COVID-19. Collective balances through March 2021 were $157 billion lower than the end of 2019, which the NY Fed noted as "consistent with both paydowns among borrowers and reduced consumption opportunities."

Based on average incomes of zip codes, lower-income borrowers reduced their card balances by 15% since the pandemic began while the highest-income borrowers reduced their balances by 19%.

At the same time, the NY Fed warned that the "decline in card balances should be interpreted with caution, as we are unable to distinguish between new spending and older, carried-over balances."

The report is based on data from the NY Fed's Consumer Credit Panel, which is a nationally representative random sample of individual and household-level debt and credit records drawn from anonymized Equifax credit data.

“2021 began with a strong increase in new extensions of mortgage and auto loan credit coupled with a substantial drop in credit card balances,” Andrew Haughwout, senior vice president at the New York Fed, said in a statement. “However, surging retail sales volumes suggest that a combination of stimulus checks, increased consumer confidence, and pent-up demand are both supporting consumption and also helping borrowers reduce revolving debt balances.”

Student loan balances increased by $29 billion to $1.58 trillion in the first quarter. At the same time, only 6.2% of student loans were in serious delinquency or default in the first quarter of 2021 due to the payment pause and debt collection moratorium imposed by the Department of Education.

Elsewhere, mortgage balances as seen on consumers' credit reports also increased by $117 billion to $10.16 trillion, but balances on home equity lines of credit saw a $14 billion decline, which is the 17th consecutive decrease since the last quarter of 2016.

Auto loan balances increased by $8 billion, and only 15% of the $153 billion of newly originated auto loans were to borrowers with credit scores below 620, which is "the lowest share seen in the history of the data," the authors noted.

'Financial literacy will continue to be key' for Gen Z, millennials

The NY Fed researchers also noted a divergence in balances between demographics.

Since the summer of 2020, credit card balances of borrowers in their 20s were "nearly back to their previous levels by the end of the year."

On the contrary, balances of older borrowers — especially those aged 60 and up — continued to decline.

"We think this reflects, to an extent, the differential response to the risks from the virus itself — younger people have begun to resume their outside activities, while older people were more likely to remain cautious about the risk, opting to continue to stay home," the NY Fed stated.

A separate study of 20,181 college students in 34 states by AIG Retirement Services and EVERFI, conducted between October 1, 2020 and March 31, 2021, also found an increasing reliance on credit cards.

The study found that 48% of students surveyed have a credit card, which is up from 40% a year ago. And among college students who had a credit card, 53% had two or more.

Among the student credit card holders, 40% said they have more than $1,000 in credit card debt while 14% owed more than $5,000. Two in five also did not expect to pay their entire credit card bill to avoid paying interest.

“We have been encouraged to see college students responding to the COVID pandemic with such resilience but worry they may be getting ahead of themselves financially,” Ray Martinez, co-founder and president of EVERFI, said in a statement. “Financial literacy will continue to be key as students find the right strategies for managing their money and working toward successful financial futures.”

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Aarthi is a reporter for Yahoo Finance. She can be reached at [email protected]. Follow her on Twitter @aarthiswami.

Read more:

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• Education Department undersecretary nominee details Biden's student loan forgiveness priorities

• Student loan forgiveness: New Education Department data highlights benefits of cancellation

• Senator Elizabeth Warren breaks down America's 'broken student loan system'

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