Rising Credit Card Delinquencies and Charge-Offs: Early Warning Signs for Bank Investors?

The U.S. banking sector is navigating a delicate balancing act in 2025. While credit card delinquency rates have stabilized and shown modest improvement, the underlying trends reveal a growing divide between prime and subprime borrowers. For investors, these metrics are not just numbers—they are early warning signals about the long-term credit risk and profitability sustainability of banks operating in a high-interest-rate environment.

The Delinquency Dilemma: Stabilization Amid Strain

In Q2 2025, the 30-day delinquency rate for U.S. credit cards fell to 3.05%, a decline from 3.08% in Q4 2024. The 90+ day delinquency rate also dropped to 2.17%, marking the second consecutive quarter of year-over-year improvement. These figures suggest a stabilizing consumer credit landscape, but the story is far from uniform. Subprime borrowers—those with credit scores below 600—continue to bear the brunt of economic pressures. Their delinquency rates remain elevated, with Equifax noting a “K-shaped split” in the market where subprime debtors lag behind prime borrowers.

The Federal Reserve's data underscores this disparity: 6.93% of credit card balances transitioned to delinquency over the past year, with subprime accounts accounting for a rising share of this total. For context, the average annual percentage rate (APR) on credit cards now exceeds 24%, up from 20.14% during the pandemic. This surge in borrowing costs, coupled with inflationary pressures, has left many subprime borrowers in a precarious position.

Charge-Offs: A Lagging but Looming Indicator

Charge-off rates, which reflect the proportion of unpaid debt that lenders write off, have also stabilized but remain elevated. In Q2 2025, the net charge-off rate for credit cards stood at 4.29%, down from 4.54% in Q1 but still significantly higher than pre-pandemic levels. The Federal Reserve attributes this to a 9–12-month lag between financial distress and formal legal actions, suggesting that charge-offs may rise further in 2025.

Banks are responding with tighter underwriting standards. Large banks reduced the subprime share of credit card originations from 23.3% in Q1 2022 to 16.4% in Q1 2025. This shift has curbed the growth of new accounts and slowed balance accumulation, but it has also left a gap in the market that private-label credit cards—known for higher interest rates—are filling. The average APR for private-label cards now exceeds 31%, a record high.

Banks' Risk Management Reckoning

The Federal Reserve's cautious approach to rate cuts—projected to deliver only two reductions in 2025—has forced banks to recalibrate their risk management strategies. JPMorgan Chase, for instance, reduced its loan loss provisions in Q2 2025 to $2.4 billion from $3.3 billion in Q1, citing improved credit performance. Bank of America similarly adjusted its provisions upward to $1.6 billion, but this was driven by macroeconomic forecasts rather than asset-level deterioration.

However, the commercial real estate (CRE) sector remains a wildcard. Regional banks with CRE loan exposures exceeding 199% of risk-based capital (compared to 54% for large banks) are particularly vulnerable. Wells Fargo's decision to reduce its CRE office loan reserves by $105 million in Q2 2025 signals a cautious optimism, but the sector's recovery is far from assured.

Investment Implications: Navigating the K-Shaped Recovery

For investors, the key takeaway is that the U.S. banking sector is not a monolith. Banks with strong risk management frameworks and diversified portfolios—such as JPMorgan Chase and Bank of America—are better positioned to weather the current environment. Conversely, regional banks with heavy CRE exposure or lax underwriting standards face heightened risks.

The subprime credit card market, while a drag on profitability, also presents opportunities. Banks that can offer tailored financial products to subprime borrowers—without exacerbating delinquency risks—may capture market share. However, this requires a delicate balance between accessibility and prudence.

The Road Ahead: A Test of Resilience

The Federal Reserve's monetary policy will remain a critical factor. If inflationary pressures persist and rate cuts are delayed, delinquency rates could rise further, particularly among subprime borrowers. Banks must also contend with the resumption of federal student loan collections, which could strain household budgets and indirectly impact credit card repayment.

For now, the data suggests a stabilizing but fragile environment. Investors should monitor key indicators: the trajectory of delinquency rates, the pace of charge-off increases, and banks' willingness to adjust underwriting standards. Those that prioritize resilience over short-term gains may emerge stronger in the long run.

In conclusion, rising credit card delinquencies and charge-offs are not just red flags—they are a call to action for investors to reassess their banking sector allocations. The winners will be those institutions that can navigate the K-shaped recovery with agility, discipline, and a focus on long-term sustainability.