The Next Phase Is Here

Credit Cracks Are Spreading: Rising Delinquencies And Recession Signals To Look Out For In 2025.

In earlier pieces, I focused on what most of Wall Street had been overlooking. Mortgage delinquencies were the first signal. Then came auto loan defaults, reaching a 15-year high where even subprime borrowers began missing payments on the one item that often determines employment: their vehicle. Credit cracks are appearing.

These weren’t isolated issues. They marked a shift from stretched to strained across consumer credit. Now that strain is expanding steadily and across layers of the market. And still, most investors aren’t pricing it in.

Credit stress doesn’t erupt. It spreads. We’ve moved from warning signs to a broader spillover. Repricing is the next phase and it’s already in motion.

Credit Is Weakening From The Middle

This is no longer just about subprime risk. A Bankrate report shows credit card balances have jumped over 50% since early 2021. But more telling is who’s under pressure now.

Prime borrowers with strong credit and stable income are starting to slip. Experian’s Q3 2024 data reports that while average FICO scores remain at 715, monthly non-mortgage debt payments have climbed 5.2% year-over-year. That tension is showing up in student loans and other floating-rate debt.

Buy Now, Pay Later platforms are adjusting. Klarna, Affirm, and Afterpay are shortening repayment terms and tightening approval standards. They’re reacting to real-time data from their own books.

Stress is moving up the credit curve, and the signs are visible.

Lending Standards Are Tightening Fast

Defaults are rising and lenders are pulling back. That much is expected. What stands out now is how early and broadly this retrenchment is happening.

Regional banks, still vulnerable after the SVB collapse, are quietly retreating from consumer credit. The Fed’s latest Senior Loan Officer Survey shows tightening across personal credit, auto loans, and cards. Fintech lenders dependent on securitization see funding slow as ABS market appetite weakens. In some cases, new loan originations have stalled altogether.

Consumer loan growth has gone flat. In certain sectors, it’s shrinking. When credit access disappears, risk spikes, not always due to income loss, but from the absence of rollover liquidity.

Liquidity is vanishing. And as it dries up, consumer behavior turns fast.

Earnings Will Show The Stress

The numbers are about to reflect what the data has already been suggesting. Starting in Q3 and continuing through Q4, we’ll likely see pressure in three key areas:

• Reserve Builds: Expect lenders to increase loan loss reserves. This won’t be framed as a one-off; it will mark a trend.
• Charge-Offs: Institutions like Ally, Capital One, and Discover are already seeing rising losses. Those figures are expected to accelerate.
• Guidance Cuts: Softened outlooks will reference “credit normalization” or “quality headwinds.” The subtext: earlier assumptions were too optimistic.

Retailers will also feel it, especially those exposed to private-label credit. Think Best Buy, Target, or any business with embedded financing models.

The Risk Is Micro, Not Macro

Despite mounting signals, investor positioning hasn’t changed much. Regional banks still trade at 1.2–1.4x tangible book. Consumer lenders remain priced for smooth conditions. Auto ABS spreads remain tight, even as default risk increases.

The disconnect lies in the story markets are telling themselves. Wages are stagnant. Pandemic savings are exhausted. Credit growth is stalling. But investor optimism hasn’t caught up to this reality. It’s about slow erosion through liquidity withdrawal and shifting consumer behavior.

By late 2023, we saw early signs: rising balances, spending fatigue, and payment slippage. Now we’re in the broader stress phase: credit cards, auto loans, BNPL, and even prime borrowers are under pressure.

Next comes institutional reaction: reserve builds, risk repricing, and M&A among overstretched lenders.

Where Dislocation Creates Opportunity

When data and narrative diverge, opportunity emerges.

• Short-Term: Consumer lenders like Ally, OneMain, and Santander Consumer are still priced for stability. But their reserve coverage is thin, and the default risk is climbing.
• Mid-Term: Consolidation is likely among smaller, over-leveraged players; regional banks and fintech credit firms under pressure will be acquisition targets.
• Long-Term: Firms like Encore Capital and Alorica make their money in distress, not growth. As delinquencies rise and service gets more fractured, these recovery players step in. They’re not optional; they are infrastructure.

How To Protect Yourself

The popular narrative that the consumer is fine is already outdated. Behavior is shifting. Defaults are spreading. Liquidity is contracting. Markets haven’t priced it in yet. But the repricing phase is underway. This is a moment for positioning, not reaction. The advantage belongs to those who act early while others are still watching lagging indicators.

The credit cracks are widening. And those who are tracking the underlying behavior already know what’s next.