Consumer spending is strong. So is financial fragility

Recent macroeconomic data paints a contradictory picture: consumer spending is rising, but so is consumer debt distress. For lenders and servicers, this paradox signals a more nuanced environment for recovery strategies.

Spending Growth Doesn't Equal Financial Health

Retail and discretionary spending have surged in 2025, supported in part by higher credit card usage. According to recent reports from TransUnion and the New York Fed, revolving credit balances continue to climb even as average interest rates remain above historical norms.

This activity suggests consumer confidence, but it also raises red flags. Elevated credit usage often indicates short-term liquidity reliance rather than long-term stability. Delinquencies, particularly in unsecured credit segments, are also ticking upward.

A Closer Look at the Data

• Credit utilization rates are near multi-year highs, especially among mid-score borrowers
• Delinquency rates are rising fastest in younger and lower-income cohorts
• Savings rates remain below pre-pandemic averages, limiting consumers' capacity to absorb financial shocks

These indicators point to what some analysts are calling "surface resilience,” a scenario where consumer activity remains high, but underlying financial fragility is increasing.

What This Means for Lenders

1. Reassess Segmentation Models: Traditional risk models that rely on spending behavior or past delinquency may miss early signs of fragility. Lenders should incorporate broader indicators such as utilization volatility, payment timing patterns, and settlement inquiry volume.
2. Structure Settlement Pathways Earlier: Delaying engagement until charge-off may lead to missed opportunities for resolution. Offering a structured path to settlement earlier in the lifecycle—supported by verified consent and secure communication—can improve outcomes.
3. Bolster Communication Infrastructure: In an environment where financial stress may increase consumer responsiveness, the ability to deliver timely, compliant outreach across channels is critical.

The recovery landscape in 2025 demands more than traditional segmentation. As spending increases and fragility rises, lenders should be ready to engage consumers through structured, early-stage resolution strategies. Settlement—properly integrated—can serve as a pressure-release valve, offering borrowers a path forward and lenders a measurable recovery outcome.

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