Fed Report Shows Surprising Drop in Subprime Credit Card Demand

Subprime card customers are temporarily easing back on the gas pedal, according to recent data from the Federal Reserve Bank of Kansas City.

Despite several years of increasing delinquency rates and sustained economic stress, as of January 2025, the subprime delinquency rate has dropped for two consecutive months, though it remains elevated.

Jordan Pandolfo, an economist with the Federal Reserve Bank of Kansas City, recently released an Economic Bulletin that analyzed monthly account-level credit card information from large U.S. banks and issuers.

Subprime credit card customers, traditionally a bellwether for consumers’ woes, have surprised lenders.

In a follow-up interview, Pandolfo pointed to the unexpected plateau — and even decline — in subprime delinquencies observed since November 2024. “Despite a bleak macroeconomic outlook for subprime borrowers, we’ve seen delinquency rates flatten out or fall slightly,” he said.

The monthly account-level credit card data offers detailed information regarding the activity of consumers, including APRs, delinquencies, and buying behavior. As opposed to data that is region-specific, this series offers a national outlook, making it an effective measure for assessing borrower-classed consumer credit health.

Subprime borrowers are, for the purpose of this report, borrowers who have a credit score that is less than 620. The delinquency rate at hand is from accounts that are 30 or more days past due.

One would naturally assume that softening delinquencies would indicate stronger financial standing, but other indicators paint a more nuanced picture. Subprime APRs have fallen in recent months, but so has purchase activity.

That confluence, in Pandolfo’s opinion, may indicate decreasing demand for credit on the part of subprime consumers.

“The data seems to be telling a demand-side story,” Pandolfo explained. “Subprime borrowers are purchasing less with their cards. That reduced demand could be pushing APRs down, which in turn may be contributing to the drop in delinquencies.”

Although subprime borrower average APRs fell about 200 basis points from mid-2023 to early 2024, revolving balances remained flat. That indicates that borrowers are not increasing new borrowing, but they are not paying down outstanding balances either.

Though the exact cause of the softening demand for credit cards is unknown, one theory is that these consumers are cutting back under tight household budgets. But Pandolfo emphasizes that the cause is an open question that needs more data to answer.

The decrease in borrowing costs and the decline in the usage of cards among subprime consumers come at an interesting juncture. A return to federal student loan payment schedules, plus increasing costs of living, was set to tighten household budgets and spur credit dependence.

Subprime consumers instead seem to be pulling back — a strange reversal.

“With student loan delinquencies rising and credit scores dipping, you’d think subprime demand would increase,” noted Pandolfo. “But we haven’t seen that yet.”

This dissonance raises an important question for card issuers: Are subprime borrowers becoming more cautious, or just tapped out?

Although the Fed does not provide direct guidance for businesses, the data could prove useful to lenders to interpret as a signal of changing behavior. A pullback in subprime demand can influence underwriting, product design, and risk management policies.

Subprime credit cards historically have higher APRs than do prime credit cards to account for the significant risk lenders assume with subprime credit cards over prime cards. But the spread has narrowed, the bulletin analysis found.

On charts in the report, the gap between prime and subprime APRs contracted at the end of 2023 and the beginning of 2024.

“What we’re seeing may reflect a sharper contraction in subprime demand relative to prime,” Pandolfo said. “That kind of tightening in risk spreads often signals shifting borrower behavior.”

The compression across APRs in these spreads might signal that issuers are pricing based on real-time borrower information. The specific inputs that drive APRs in the subprime space are not entirely explicit — some issuers price on credit score along with income, for example, or add on market-based pricing models.

More study is required to see how these inputs influence lending.

Prime borrowers have held steady so far. Their delinquencies have not shifted, and purchase activity is holding strong. But the question is whether the subprime pullback will spread upward.

“Subprime is more cyclical and volatile, which is why we sometimes think of it as a leading indicator,” Pandolfo noted. “If cracks form there, we want to watch closely for signs they might extend into prime.”

Subprime markets can act as the canary in the coal mine — and that bird has switched melodies. If lenders start noticing the same sorts of activities in the prime space, they might have to shake up overall portfolio strategies ahead of schedule.

With two months of declining subprime delinquencies on the books, it’s too early to declare this a new normal. But even a short slowdown is reason enough to raise questions regarding consumer behavior and credit demand.

Pandolfo added that several more monthly records would have to be seen to ascertain whether this is anomalous or a part of an emerging pattern.

Pandolfo will continue to study the next round of data that is released. Subprime lenders and card issuers should position for either scenario: a rebound based on increasing borrower stress or an extended period of restraint that can require a strategic redirection.

Either way, something has indeed shifted. “I’ll definitely be keeping an eye on it,” he said. “It’d be interesting to see if this is just a blip or a continuing trend.”

Those paying attention now may be best positioned to respond if and when the trend becomes clear.