U.S. consumer spending has shown remarkable resilience through 2025, even as inflation and interest rates remain higher than average. A closer look at the data suggests that a growing share of household consumption is being supported by credit rather than by income growth. This pattern underscores how borrowing helps sustain demand while also raising questions about long-term financial stability.
According to the Federal Reserve Bank of New York, total U.S. household debt rose by $197 billion in the third quarter of 2025, reaching a record $18.59 trillion. Revolving balances, mainly credit cards, climbed faster than other categories. At the same time, delinquencies on credit-card and auto loans have edged higher, especially among younger and lower-income borrowers. These developments illustrate how credit expansion acts as both a driver of spending and a potential source of vulnerability in the broader economy.
Household Debt Trends and the Role of Credit Access
Consumer credit acts as a bridge between income and spending. When wages lag behind costs, households rely more on credit cards or loans to maintain their standard of living. Over time, this can boost consumption in the short run but create repayment stress later. According to the Federal Reserve’s Senior Loan Officer Survey, banks reported tighter lending standards for most consumer loans through mid-2025. Despite these tighter conditions, aggregate borrowing has continued to grow, suggesting strong underlying demand for credit.
Part of this demand stems from the uneven recovery in real wages. While nominal incomes have risen, inflation-adjusted purchasing power remains flat for many households. As prices for food, housing, and transport remain elevated, consumers are turning to short-term financing options. This reliance on credit allows spending to stay elevated but also makes households more sensitive to interest rate increases.
Financial analysts often describe this stage as a “maturity” phase in the credit cycle — where spending continues despite slower income growth. It signals confidence among consumers but also a heavier burden on balance sheets. As debt-service costs rise, the share of disposable income devoted to repayments may limit future spending growth.
Interest Rates, Credit Costs, and Consumer Behaviour
Borrowing decisions are closely linked to interest-rate conditions. The Federal Reserve’s policy rate remains near multi-decade highs, which affects everything from credit-card annual percentage rates (APRs) to auto-loan financing. Average credit-card interest rates surpassed 22% in 2025, the highest level recorded by the Fed since tracking began. This environment creates a challenging trade-off: consumers must decide between sustaining lifestyle spending and managing higher repayment costs.
Evidence suggests that many are choosing to keep spending, at least for now. The Experian Consumer Credit Review found that average revolving credit balances increased by over 6% compared with last year. Credit utilization rates — the percentage of available credit currently used — are now at levels last seen in 2019. While this reflects consumer confidence, it also raises questions about repayment resilience if employment or income growth slows.
From a macroeconomic perspective, elevated borrowing costs tend to delay the full impact of monetary tightening. Consumers continue to spend, supporting GDP in the short term, but their debt positions can weaken over time. Economists at several regional Federal Reserve Banks warn that if credit growth remains high while delinquencies continue to rise, financial stress could surface unevenly across demographic segments, particularly younger adults and renters with limited savings buffers.
Credit Quality, Demographics, and Systemic Risk
Not all borrowing carries equal risk. Higher-income households, with greater access to credit and stronger repayment capacity, account for a large share of total balances. However, delinquency rates are concentrated among lower-income borrowers and younger credit holders. The New York Fed’s Q3 2025 report noted that 7.8% of credit-card balances and 4.2% of auto loans were at least 30 days delinquent, the highest levels since 2020.
This divergence matters for financial stability. Banks may tighten credit conditions further if delinquencies continue to climb, reducing available financing for households that rely on it most. The effect could be a soft pullback in consumer spending during early 2026, particularly in discretionary sectors such as apparel, travel, and durable goods.
Still, systemic risk remains limited for now. The overall debt-service ratio — household debt payments relative to disposable income — is below its long-term average. This suggests that while repayment pressures are building, the broader credit system retains resilience. The challenge will be maintaining that balance as interest rates remain high and employment growth slows.
Spending Patterns and Economic Impact
Consumer spending accounts for roughly two-thirds of U.S. GDP. Credit expansion therefore supports both retail sales and overall economic momentum. Yet this support depends on the continued availability of lending and consumers’ willingness to take on new debt. If banks restrict credit or if borrowers become cautious, spending momentum could fade quickly.
Retail sales data show signs of softening in discretionary categories, even as essentials remain steady. This pattern suggests households are prioritizing necessary goods while trimming optional purchases. Businesses exposed to credit-sensitive consumers — such as electronics, home goods, and mid-tier retail — may experience a more noticeable slowdown heading into early 2026.
For policymakers, the situation presents a delicate balance. Sustained consumer spending supports growth, but overreliance on credit could amplify financial stress later. Monitoring delinquency data and credit growth trends will be crucial in determining whether U.S. consumption remains stable or faces a correction.
The Outlook for 2026
Most economists expect household debt to keep expanding moderately through next year, though at a slower pace than in 2025. As wage growth stabilizes and inflation gradually cools, some pressure on consumer finances may ease. However, if unemployment rises or credit costs remain elevated, defaults could increase.
Financial institutions appear aware of these risks. Banks are managing exposure by maintaining higher reserves and focusing on prime borrowers. Non-bank lenders, which serve riskier credit segments, could face challenges if delinquencies rise faster than expected. For investors and policymakers alike, credit data remain a critical leading indicator of U.S. economic momentum.
Despite these uncertainties, the broader system remains well-capitalized and stable. Households are under strain but not in crisis. The expansion of consumer credit continues to underpin spending — a reminder that borrowing, while necessary to sustain demand, must be matched with responsible lending and measured income growth to avoid cyclical strain.
