Consumer loans make up about one-third of US banks’ loan portfolios, playing a significant role in their profitability and growth. According to Moody’s Analytics, the performance of household credit is closely tied to bank earnings and overall economic health, as consumer spending accounts for two-thirds of the US gross domestic product.
When households manage debt effectively—avoiding delinquencies and defaults—banks see improved operations and are more willing to lend. This cycle helps support household finances, encourages investment, and drives economic growth.
Moody’s Analytics notes that trends in delinquencies and charge-offs offer important insights into the asset quality of banks. After peaking in 2024, delinquencies for credit card and auto loans have generally improved. Asset quality metrics are expected to remain stable in the near term. Seasonal factors like summer vacations and holiday spending typically push delinquencies higher in the second half of each year, while they tend to decline early in the year as consumers receive tax refunds and bonuses.
Two key indicators used by regulators include delinquency rates—the percentage of loans past due by 30 or more days—and net charge-off rates—the annualized percentage of loans written off as losses due to nonpayment.
Residential mortgages are the largest part of consumer lending at banks, but credit cards remain the most volatile segment because they lack collateral backing.
Since the financial crisis of 2007–08, overall consumer debt levels have declined relative to income and GDP. However, lower- and middle-income borrowers have not benefited equally from rising wealth and have been more affected by inflation. Banks focusing on prime borrowers face less risk than those with greater exposure to near-prime or subprime customers.
In recent years, nonbank lenders have taken a larger share of consumer lending markets such as residential mortgages and student loans. These nonbanks are considered less diversified than traditional banks and do not benefit from stable deposit funding. A sharp reduction in nonbank lending could affect broader economic activity through indirect impacts on banks.
Moody’s Analytics highlights that “a key risk to the generally stable credit performance of US banks’ consumer loan portfolios is a rise in unemployment, which would likely weaken credit performance and hurt bank profits.” The report adds that stagflation—where slow growth combines with rising unemployment and inflation—could further increase losses while slowing loan growth.
Although most households maintain solid balance sheets, weaker trends are seen among non-prime borrowers who have experienced limited wealth gains compared with more affluent groups. Aggregate data may understate debt burdens for lower-income segments.
Despite these challenges, low unemployment rates and real wage growth supported strong loan performance throughout 2025. However, Moody’s Analytics warns these positive factors may be fading: “these tailwinds are fading, which could lead to a modest worsening in the credit performance of US banks’ consumer loan portfolios in 2026,” though no significant deterioration is expected.
The outlook for global banks remains stable heading into 2026 based on expectations that sector-wide creditworthiness will stay strong.
