Is There a Consumer Credit Crisis?

The Current State of Consumer Credit and Its Impact on the Economy

As of early 2025, the consumer credit landscape in the U.S. is at a pivotal moment, with shifting debt levels, fluctuating interest rates, and significant economic implications. While credit remains a key driver of consumer spending, rising debt and high borrowing costs are shaping both individual financial health and broader economic trends.

Consumer Credit Trends

Recent reports show that total consumer credit in the U.S. has declined in recent months. In November 2024, overall consumer borrowing dropped by approximately $7.5 billion, reversing the previous month’s $17.3 billion increase. This shift was mainly due to a sharp decrease in credit card debt, while loans for cars and education continued to rise at a modest pace.

Despite this recent dip, overall credit usage has surged in the past few years. Since early 2021, credit card balances have grown by over 50%, reaching record highs and surpassing pre-pandemic levels. This increase highlights a growing reliance on borrowing to sustain household spending.

Rising Interest Rates and Consumer Debt

Even though the Federal Reserve began cutting interest rates in late 2024, many borrowers have yet to see a meaningful reduction in their borrowing costs. Mortgage rates have remained high, auto loan rates have barely changed, and credit card APRs have only slightly decreased. This is largely because long-term Treasury bond yields, which influence consumer borrowing costs, have not responded as quickly to Fed policy changes as some expected.

How Consumer Credit Affects the Economy

Consumer spending makes up nearly 70% of the U.S. economy, and much of this spending is fueled by credit. The rise in household debt—now nearing $18 trillion—has played a crucial role in keeping the economy growing. However, as debt levels climb, there’s a risk that consumers could become overextended, limiting their ability to continue spending at the same pace. If too many households struggle to manage their debt, it could slow down economic growth.

Consumer Credit and Inflation

The relationship between credit and inflation is complex. When consumers borrow more, they spend more, driving up demand for goods and services. If businesses can’t keep up with demand, prices rise, fueling inflation. On the other hand, inflation can make everyday expenses more costly, pushing consumers to rely even more on credit to cover their needs. This increased borrowing demand can, in turn, lead to higher interest rates, making it even more expensive for consumers to manage their debt.

The Credit-Debt Cycle

The cycle of borrowing, spending, and debt repayment plays a key role in financial markets. Consumers use credit to make purchases, driving up demand and potentially leading to price increases. As prices rise, some borrowers find themselves struggling with high debt balances, leading them to seek relief through debt consolidation programs or balance transfers. While these options can provide temporary financial breathing room, they sometimes encourage further borrowing, creating a cycle that’s difficult to break.

Final Thoughts

While credit is essential for economic growth and personal financial flexibility, growing debt levels and high borrowing costs highlight the need for responsible financial management. If debt continues to rise without careful regulation and consumer awareness, it could contribute to financial instability in the long run. Both policymakers and individuals must take steps to ensure that borrowing remains sustainable—so that credit continues to support, rather than threaten, economic stability.