Rising Consumer Credit Stress and Its Implications for the U.S. Economy and Financial Markets

The U.S. consumer credit landscape in 2025 is marked by a fragile equilibrium, with rising debt levels, diverging income impacts, and inflation-driven pressures creating a volatile backdrop for financial markets. Total consumer debt has surged to $17.86 trillion, with credit card balances alone exceeding $1.07 trillion and auto loan debt reaching $1.68 trillion Equifax National Market Pulse Data Shows U.S. Consumers^[1]. While aggregate delinquency rates remain stable at 1.5%, the strain is disproportionately concentrated among subprime borrowers, whose share of credit card debt has jumped 50.9% since May 2021 to 22.1% Equifax National Market Pulse Data Shows U.S. Consumers^[2]. This K-shaped recovery—where prime borrowers fare better than subprime—highlights a deepening divide in financial resilience.

Inflation and the Erosion of Credit Health

Inflation has amplified these risks, squeezing households already burdened by high-interest rates. According to a report by the Federal Reserve Bank of New York, household debt reached $18.04 trillion in Q4 2024, with credit card balances climbing to $1.21 trillion Household Debt Balances Continue Steady Increase^[3]. However, real growth in credit balances, adjusted for inflation, is a mere 3%, reflecting a deleveraging trend as consumers curb spending TransUnion Reports Complex Trends in Consumer Credit Balances^[4]. The National Foundation for Credit Counseling (NFCC) projects financial stress to rise to 6.1 in Q1 2025, a level not seen since the Great Recession NFCC Forecasts Increasing Financial Stress Amid^[5].

The auto sector, a bellwether for consumer confidence, is under particular strain. Delinquency rates for auto loans have reached 14-year highs, with subprime borrowers facing a 1.41% delinquency rate in May 2025 U.S. Consumer Debt Hits $17.8 Trillion as Delinquency Risk^[6]. Meanwhile, falling used car prices have left some borrowers underwater on their loans, exacerbating financial instability us household debt 2025: US household debt hits record high^[7].

Student Debt and Generational Strain

Student loan delinquency rates, which resumed reporting in 2025, have spiked to 17.95% as of June 2025, with severe delinquency (90+ days past due) peaking at 18.73% in May Equifax National Market Pulse Data Shows U.S. Consumers^[8]. This crisis disproportionately affects Gen Z and millennials, whose credit card delinquencies have nearly doubled since the pandemic U.S. Consumer Debt Hits $17.8 Trillion as Delinquency Risk^[9]. For the lowest-income 10% of ZIP codes, credit card delinquency rates hit 22.8% in Q1 2025, compared to 8.3% for the highest-income areas Consumer Debt Statistics 2025: Shocking Balance Trends^[10]. These disparities underscore how inflation and income inequality are compounding credit stress.

Sector-Specific Risks and Financial Market Implications

The retail and auto sectors are particularly vulnerable. TransUnion's Q1 2025 report notes that elevated interest rates and inflation have forced banks to refine risk management strategies, including scenario modeling for granular economic shifts TransUnion Reports Complex Trends in Consumer Credit Balances^[11]. In Europe, U.S. auto tariffs have added uncertainty, though mitigated by hopes for improved trade deals Industry Credit Outlook 2025 | S&P Global^[12]. For banks, the risks are acute: the Federal Reserve has flagged commercial real estate (CRE) as a key vulnerability, with regional banks facing higher borrowing costs and declining asset values The Fed - 5. Near-Term Risks to the Financial System^[13].

The broader financial system also faces risks from inflationary dynamics. The IMF warns that supply-driven inflation—such as energy shocks—can trigger financial stress after rate hikes, creating a trade-off between price and financial stability Monetary tightening, inflation drivers and financial stress^[14]. This contrasts with demand-driven inflation, which may not exacerbate stress and could even reduce it in some cases Monetary tightening, inflation drivers and financial stress^[14].

Investor Implications

For investors, the implications are clear. Consumer-driven sectors like retail and auto must brace for continued volatility, with subprime borrowers and lower-income households representing heightened credit risk. Banks with concentrated CRE exposure—particularly regional institutions—deserve closer scrutiny. Conversely, sectors less sensitive to consumer spending, such as utilities or healthcare, may offer relative stability.

Conclusion

The U.S. consumer credit market is at a crossroads. While aggregate delinquency rates remain stable, the underlying trends—rising debt, income inequality, and inflationary pressures—signal growing fragility. As the Federal Reserve navigates the delicate balance between curbing inflation and preserving financial stability, investors must remain vigilant to the risks in credit-dependent sectors. The coming quarters will test the resilience of both households and institutions in a high-interest-rate environment.