The Split in Consumer Credit: A Warning for Borrowing Costs and Markets

The U.S. consumer credit landscape is fracturing. While nonrevolving credit—such as auto loans and student debt—remains stable, revolving credit (credit card debt) has surged in recent months, creating a stark divergence that signals both opportunities and risks for investors. The May 2025 credit report, which showed a disappointing $5.1 billion monthly increase against expectations of $10.5 billion, underscores a critical shift in how households are managing debt. This split between cautious borrowing for discretionary spending and steady demand for installment loans could reshape borrowing costs and equity market dynamics in the coming quarters.

The Credit Divergence: A Tale of Two Debt Markets

The Federal Reserve's May report highlights two contrasting trends. Revolving credit grew at a 7% annualized rate—the fastest since late 2022—driven by a rebound in consumer spending on travel, dining, and discretionary goods. This aligns with the Federal Reserve Bank of New York's data showing credit card debt hitting $1.18 trillion in early 2025, a 54% increase from pandemic lows. However, this surge comes with risks: average APRs on new credit card offers rose to 24.33% in June, the highest since December 2024, amplifying interest costs for borrowers.

Meanwhile, nonrevolving credit—led by auto loans and student debt—expanded at a modest 3.3% annual rate. This stability reflects structural demand for essential purchases: auto loans account for 25% of nonmortgage consumer credit, and student debt remains a long-term fixture despite federal relief programs. The May report also noted a break in data series for the nonfinancial business sector, which had previously inflated total credit figures but is now excluded due to data gaps. This adjustment clarifies that the slowdown in overall credit growth is not an illusion but a reflection of genuine shifts in borrowing behavior.

Why the May Miss Matters

The $5.1 billion monthly credit increase fell far below expectations, contrasting sharply with the robust $24.7 billion surge in December 2024. Analysts attribute the December spike to holiday spending and the inclusion of nonfinancial business sector data, which was later discontinued. However, the May miss suggests households are becoming more selective: they're leaning on credit cards for discretionary purchases but hesitating to take on larger installment loans. This divergence hints at underlying caution—consumers may be borrowing aggressively now but fear future economic uncertainty.

Interest Rate Risks: The Elephant in the Room

The Federal Reserve's pause on rate hikes since January 2025 has alleviated some pressure, but risks remain. The average APR on credit card accounts accruing interest fell to 21.91% in Q1 2025, down from 22.80% in late 2024, but new credit card offers now carry rates near 24%. With the Fed expected to hold rates steady until at least mid-2026, borrowers will face elevated costs for years. The 30-day delinquency rate, while improving to 3.05%, remains above pre-pandemic lows, suggesting even small rate increases or economic shocks could destabilize repayment trends.

For investors, this creates a dual risk: rising interest costs could squeeze consumer spending, while lenders exposed to credit card debt (e.g., banks like JPMorgan or Citigroup) face margin pressures if delinquencies rebound.

Investment Implications: Navigate with Caution

The credit divergence points to uneven resilience in equity markets. Sectors to favor include:
1. Low-leverage, cash-rich companies: Utilities (e.g., NextEra Energy), healthcare providers (e.g., UnitedHealth Group), and consumer staples firms (e.g., Procter & Gamble) have stable cash flows and minimal debt exposure.
2. Auto and student loan originators: Companies like Sallie Mae or specialized auto lenders could benefit from steady demand for installment loans, though investors should monitor APR trends.

Sectors to avoid:
1. High-debt retailers and travel firms: Companies reliant on consumer discretionary spending (e.g., Walmart, Carnival Cruise Lines) face margin pressure as credit card debt servicing costs rise.
2. Banks with heavy credit card portfolios: Elevated delinquency risks could hit earnings if economic headwinds emerge.

The Bottom Line

The U.S. consumer credit split is a warning sign. While auto and student loans signal structural demand, the volatile growth in credit card debt—amplified by rising rates—creates vulnerabilities. Investors should prioritize defensive sectors and avoid over-leveraged businesses. As the Federal Reserve's pause on rate hikes stretches, the true test of consumer resilience will come when (not if) interest rates edge higher again. Until then, the divide between revolving and nonrevolving credit remains a critical lens for navigating market risks.