As U.S. banks develop their playbook for 2026, record-setting levels of credit card and auto loan debt are top of mind, fueling concerns about a potential recession. What are the causes of this debt? How can banks address it, and what should be the real level of worry about an economic downturn?
Americans’ total credit card balance was $1.233 trillion as of the third quarter of 2025, up from $1.209 trillion in Q2. That’s the highest balance since the Federal Reserve Bank of New York began tracking consumer debt data in 1999.
Auto lending, meanwhile, is staring at major debt issues of its own. Americans owe $1.66 trillion in auto debt, according to a new report from the Consumer Federation of America. What’s more, as of October 2025, a record 6.65% of subprime auto loans were 60 days or more past due.
(Disclaimer: The views expressed herein are solely those of the interviewee.)
Subramanian Narayanaswamy (Subbu Narayanaswamy | LinkedIn), a financial services professional with expertise in consumer lending risk, says that U.S. banks must keep a close eye on credit cards and auto loans because they “literally touch our everyday lives, and are highly sensitive to economic cycles.” Americans’ credit card balances have not yet risen to the level of systemic risk, he adds, but remain worrisome. “Overall credit card spending is north of $6 trillion.1 2 That is roughly 20% of U.S. GDP and about one-third of Americans’ personal consumer expenditure,”2 observes Narayanaswamy.
It is very important for banks to understand who is carrying credit card debt and who is driving spending. Referencing data from a recent report from the Boston Federal Reserve,3 Narayanaswamy says it’s abundantly clear that credit card growth is being driven disproportionately by “higher-income consumers.” Indeed, he notes that high-income consumers are responsible for about half of total credit card spending in the U.S.4
For risk managers at banks, one of the key questions today is what would happen if top-income households cut back on their credit card spending. If they ease up by just 5%, states Narayanaswamy, it could translate into a noticeable cooling in aggregate card spending, with implications for overall economic growth trends. “There will also be pressure on banks’ net interest income if they pull back, as well as some second-order effects. For example, credit demand will come down,” he elaborates.
While this scenario is concerning, the overall metrics for credit cards are stable. Home equity is booming, card delinquencies are flattening over the past three quarters,5 and household balance sheets6 are looking “pretty strong,” observes Narayanaswamy, who remains optimistic that credit cards can avoid any significant downturn if the current macro-economic conditions hold up.
Auto Lending Debt: A Multi-Faceted Problem
Auto loans present a different set of dynamics than credit cards, and are currently suffering from what Narayanaswamy describes as a “perfect storm” of problems. Over the past seven years, higher prices, longer loan terms, and rising annual percentage rates (APRs) are among the factors that have contributed to the record-setting levels of auto debt and delinquency.
Prices for used cars, Narayanaswamy notes, are up a whopping 45% since 2019.7 Moreover, buyers are more inclined to buy used cars than new ones. “If you look at the auto market, it’s a very interesting dynamic, because roughly 60% of the new originations come from used vehicles,” says Narayanaswamy. Complicating matters further, he asserts, 30% of the used car segment is driven by subprime loans, while the average APR for a used vehicle has climbed8 from 8.5% in 2020 to an alarming 11.5% today.
Moreover, the length of loans for new cars has grown significantly. Many, Narayanaswamy states, are now for 72 months, with data trending upward for 84-month terms. That’s concerning, he says, because anything above 60 months is considered “high risk.”
Collectively, these issues are difficult to fix, partly because of the speed of auto depreciation. “As soon as a car is out of the showroom, the price drops by one-third,” Narayanaswamy explains. “It’s difficult to correct that other than repositioning. But that’s messy, capital intensive, and operationally complex.”
Being more disciplined in auto loan originations (where the loan terms are set) is one additional way that banks can try to mitigate their risk.
The Payment Hierarchy Dilemma
Taking a look at the bigger credit picture, with the high levels of credit card and auto lending debt, banks now need to consider which bills consumers are likely to pay first.
During the pandemic, consumers pulled back on spending and used stimulus support to pay down credit card balances,7 8 with many cardholders making it a priority to keep their cards current as a source of liquidity, Narayanaswamy says. At that time, of course, people were largely confined to their homes, and most business was transacted online.
Amid the 2008 global financial crisis, the traditional payment hierarchy shifted: Consumers prioritized auto payments over credit card debt, possibly because they needed mobility to get around.9
Today, says Narayanaswamy, credit cards tend to be in the middle of the payment hierarchy, behind mortgage loans and auto loans but ahead of student loans and personal loans. Borrowers must determine which bills they are going to pay off first, and, to better assess their risk, banks must have a deep understanding of the profile and behavior of their customers.
The Great Recession Debate
There’s been lots of talk about whether the high debt levels in credit cards and auto loans are a sign of an impending recession. Narayanaswamy says he is not certain whether a recession is on the horizon, but asserts that high-income earners’ huge credit card spending is an indicator that the U.S. is moving toward a “K-shaped economy.”
Banks, he elaborates, have recession playbooks, and identifying where their portfolios are most vulnerable sits near the top of those playbooks today. Disciplined pricing and targeted actions, like proactive credit line management, are additional tasks that help banks remain competitive and guard against large losses amid either a downturn or a slower growth environment.
A proper risk appetite statement, tied to capital planning and P&L, is another key component of the playbook. Today, says Narayanaswamy, a bank’s risk appetite can be used to cut its exposure to the lower end of its margin. “You should have clear thresholds for the marginal cohort for your overall portfolio,” he says. “For example, let’s say you’re underwriting a marginal cohort. You should have an appetite that says, ‘okay, my expected loss rate from this portfolio should not exceed X percent.’”
In addition to being fortified against a recession through their playbooks and risk appetite statements, banks are also subject to heavy regulation, which allows them to prepare properly for market dips and to avoid overreacting. “So, when the economic downturn hits, they know what dial to play,” Narayanaswamy explains.
By: Robert Sales
- Nilson Report – https://nilsonreport.com/articles/us-general-purpose-card-networks-through-3q-2025/
- Consumer Bankers Association (CBA Data Desk) https://consumerbankers.com/blog/from-the-cba-data-desk-credit-cards-helped-fuel-americas-fastest-post-pandemic-recovery/
- Boston Federal Reserve Report – https://www.bostonfed.org/publications/current-policy-perspectives/2025/why-has-consumer-spending-remained-resilient.aspx
- https://www.bloomberg.com/news/articles/2025-09-16/top-10-of-earners-drive-a-growing-share-of-us-consumer-spending
- Federal Reserve Board – https://www.federalreserve.gov/econres/notes/feds-notes/a-note-on-recent-dynamics-of-consumer-delinquency-rates-20251124.html
- Federal Reserve Financial Accounts – https://www.federalreserve.gov/releases/z1/20260109/html/recent_developments.htm
- US Government Accountability Office – https://www.gao.gov/products/gao-23-105269
- Federal Reserve – https://www.federalreserve.gov/econres/notes/feds-notes/why-did-credit-card-balances-decline-so-much-during-the-covid-19-pandemic-20211203.html
- TransUnion Study – https://newsroom.transunion.com/transunion-payment-hierarchy-study-finds-consumers-paying-auto-loans-before-credit-cards-and-mortgages/
