Consumer Credit Risk Is Hiding at the Margins

Consumer credit can still look stable at the top line even as stress builds in places that matter most to banks. Speaking to ProSight recently, Cristian deRitis of Moody’s Analytics and Subbu Narayanaswamy of Wells Fargo pointed to a more useful way for banks to think about the environment: the real risk is building unevenly, among specific borrowers and specific expense pressures, even when aggregate numbers still look manageable. 

That distinction matters. 

The average borrower is not the point. DeRitis described the current consumer credit outlook as “ambiguous,” with higher-income households still performing well while stress is building in other pockets, especially among lower- and middle-income borrowers in unsecured lending and autos. Narayanaswamy put the bank-risk point even more directly: “For banks, the risk is not the average borrower. It’s the borrower at the margin.” 

Required expenses are doing more of the damage. DeRitis and Narayanaswamy pointed to pressures that do not always show up cleanly in traditional credit snapshots. Narayanaswamy highlighted rent, food inflation, insurance, higher auto payments, student loans, and revolving credit. DeRitis added that insurance, property taxes, homeowners association fees, and maintenance costs are creating additional strain, in some cases rising faster than inflation. For lenders, that means the real question is no longer just what debt a customer carries, but what liquidity remains after all required payments are made. 

Auto stress is not just about delinquency. Narayanaswamy argued that auto risk today is shaped by high vehicle prices, longer loan terms, higher APRs, and looser underwriting in parts of the market during 2021 and 2022. He also warned that auto lending is less forgiving than credit cards because once the loan is booked, “we are only managing loss severity. We are not preventing the risk.” DeRitis added that rising insurance costs are an underappreciated pressure point for auto borrowers. 

Hidden leverage is making underwriting harder. Buy now, pay later is another area of concern—not because it is likely to create a systemic event, but because it can distort decision-making at the edges. As Narayanaswamy put it, “Hidden leverage does not have to be huge to distort your credit decisions at the margin.” If those obligations are not fully visible, affordability models become less reliable. 

The takeaway: Broad portfolio averages may offer some comfort, but they can also hide the borrowers and expenses that matter most in a divided economy. As deRitis said, “It’s not sufficient just to look at your specific product. You really need to understand what’s going on with the customer more broadly.”