Why borrower risk is shifting and how lenders should respond

Following the economic downturn during the Covid-19 pandemic, different parts of the economy began recovering at different rates, with higher-income individuals and tech industries thriving. However, younger generations and those with accumulated debt have been facing increased financial struggles over the past few years. Industry experts have referenced the “K-shaped economy” to describe this period of uneven growth..In 2025, consumer borrowing behavior was driven by a series of economic disruptions. Inflation still sits above the Federal Open Market Committee’s 2 percent target, while costs continue surging for essential expenses. Alongside rising costs for goods and services, a softening U.S. labor market, a decrease in job stability and an uptick in unemployment are also creating further uncertainty.In response to affordability challenges, credit card usage and debt are growing across generational cohorts — with millennials and Gen Z consumers experiencing the highest growth in their outstanding balances. According to Equifax data, in October 2025 outstanding balances on bank cards increased 3.7 percent year over year to $1.08 trillion. Explanations for this increase range from shifts in credit card usage to reliance on credit for large or essential purchases.There is also growing evidence indicating an increasing demand for personal loans and alternative financing, as more consumers search for flexible credit solutions and digital banking platforms. Equifax found that outstanding consumer finance balances climbed to $151.7 billion in the third quarter of 2025, representing a 4.1 percent increase in total balances from 2024. Often, these loans are unsecured and appealing for consumers already managing existing debt.For younger consumers, unsecured credit has become a kind of financial bridge. Unlike older generations, younger consumers may lack financial cushions garnered from decades of savings and home equity. Unsecured credit like personal loans, credit cards and buy now, pay later has become a way for younger consumers to take control of their finances in the short term. For example, 60 percent of general- admission tickets for this year’s Coachella music festival were bought using BNPL plans.Consumers are interacting with credit much differently than in the past, and banks must be proactive in adapting to these changes.What lenders should watch forStaying ahead of rising consumer credit stress starts with lenders understanding what to watch for in borrower behavior before it results in a delinquency or loss.The total consumer debt in the U.S. reached $18.09 trillion in the last quarter of 2025. Consumers are continuing to spend across categories and delinquencies remain flat. However, subprime borrowers are showing signs of strain.Currently, vulnerable borrowers in bank card debt have increased significantly, with subprime borrowers holding 22.1 percent of all bank card debt as of May 2025 — a 3.5 percent increase from the year prior. Economic conditions are creating more pressure on consumers, especially subprime borrowers with outstanding debts like student loans.Federal student loan payments resumed earlier this year following pandemic-era forbearance, with U.S. News & World Report noting typical monthly payments ranging between $200 and $299. These re-emerging payments coupled with recent shifts in the labor market, highlight the need for lenders to keep a pulse on any changes to a borrower’s employment and income. According to Challenger, Gray & Christmas, job cuts in November reached 71,321 across U.S.-based employers — contributing to the highest level of layoff announcements since 2020. Fluctuations in a borrower’s employment status and income can be a telltale sign of financial stress for borrowers. Lenders can also flag early warning signs from irregular bank account behaviors such as withdrawal spikes or frequent overdrafts. These behaviors could be indicators of heightened risk of delinquency.How lenders can respondWith the current K-shaped economy, financially vulnerable consumer segments are contending with increased financial struggles and delinquencies. This issue is compounding for those who have accumulated debt and are facing ongoing affordability challenges.Banks and lenders cannot tackle this issue by being reactive. Finding success while accounting for risk requires lenders to adopt nuanced approaches that meet borrowers in whatever financial situation they’re currently in. This goal can be supported by using alternative data.While traditional credit reports remain a strong indicator of credit history and past financial reliability, alternative data — data not found on traditional credit reports, such as rent and utility payments, bank transactions and employment and income history — can provide insights that may open additional opportunities for creditworthy individuals.As some bank customers begin experiencing shifts in their financial situation, it’s crucial that lenders understand those changes in real time. Job layoffs might not be reflected in credit reports immediately. However, alternative data, like consumer-permissioned bank-transaction data, can show those changes in a timely manner and allow lenders to take appropriate action quickly.Using these insights, banks can offer borrowers personalized support based on their income and debt profiles. Alongside supporting borrowers strategically, lenders can offer flexible repayment plans for individuals experiencing heightened financial stress. Borrowers might also benefit from more financial education, especially those struggling to manage debt in a stagnant job market.With the current economic landscape adding more pressure on borrowers, the onus is on banks to take appropriate measures to protect their portfolios while serving their customers.Shelly Nischbach is senior vice president, general manager of verification services-auto, consumer finance, debt management, and card at Equifax.