Credit Sesame explores what a rare consumer debt decline in February 2025 really means, and why this slight improvement may signal bigger financial trouble ahead.
The latest consumer credit data delivered a rare twist: in February, total non-mortgage consumer debt dipped. After years of steady increases, any decline might seem like a welcome change.
But zoom in, and the picture gets murkier. This small drop is less a sign of financial strength than a warning flag. With delinquencies rising and consumers leaning on high-cost debt, the story behind this dip reveals mounting pressure in American household finances.
Rare decline in consumer debt during February
The Fed reported that consumer debt outstanding fell by nearly $810 million in February. To put this in context, that figure represents less than 0.02% of the almost $5 trillion in non-mortgage debt American consumers owe. Still, though slight, any decline is at least a step in the right direction.
Those positive steps have been few and far between in recent years. February’s reduction in non-mortgage debt was only the fourth monthly decline since the end of 2020. During that time, non-mortgage consumer debt increased by over $800 billion. So, while consumers didn’t make substantial progress towards paying down their debt in February, at least they stopped bingeing for a month.
Cautious consumers heighten recession danger
That pullback in spending isn’t all good news. Slower consumer spending is almost certain to mean less economic growth.
Consumer spending accounts for roughly two-thirds of the US Gross Domestic Product. That means any reduction in consumer spending is almost certain to translate to a slowdown in overall economic activity.
There are three main components to GDP: personal consumption, government spending, and business investment. If consumers are borrowing less, personal consumption is likely to fall. The government is cutting spending. Many businesses are taking a wait-and-see attitude towards investment as they try to make sense of new economic policies such as tariffs.
In short, all signs point to an increased risk of a recession. Given the lead role of consumers in the economy, that’s a bad side of the news about slower borrowing.
Consumers continue to choose the wrong kind of debt
Another reason for concern in the recent numbers on consumer debt is that they indicate many are continuing to show a preference for more expensive forms of debt.
While installment debt fell at a seasonally-adjusted annual rate of 0.3% in February, revolving debt actually increased a little. Installment debt consists of loans, while revolving debt is primarily credit card balances. The problem with people choosing to borrow on credit cards rather than with loans is that credit card debt typically carries much higher interest rates.
For example, the average interest rate charged on credit card balances is 21.91%. Meanwhile, the average personal loan interest rate is just over 10% cheaper, at 11.66%. Mortgage and auto loan rates are lower still.
The high interest rate charged to credit cards means debt can continue growing unless users control their balances. Recent evidence suggests a growing number of users are having trouble doing that.
Payment details reveal a growing number of consumers on the brink
Recent data from the Federal Reserve Bank of Philadelphia shows the percentage of credit card accounts that are 90 days or more overdue is at the highest level in the 12 years they’ve been tracking this statistic. Ninety days overdue is considered seriously delinquent and is likely to hurt a person’s credit score.
This is the type of problem that starts to feed on itself. Those overdue payments will likely incur late fees, thus adding to the amount owed. The overdue balance will probably be charged a penalty interest rate, a higher interest rate charged on delinquent accounts. Therefore, the account will accrue additional interest charges more rapidly.
Not only will this cause problems for the overdue credit card account, but the resulting damage to the consumer’s credit report may result in them being charged higher rates on other accounts. Thus, a person who cannot make their payments will face a surging wave of new debt.
The percentage of accounts having this problem is already at a record high, and the Philadelphia Fed data suggest many other consumers may soon join them. The percentage of accounts making no more than the minimum monthly payment is also at an all-time high.
If a customer can’t afford to pay more than the minimum, it’s a sign that their finances are already stretched to the breaking point. Also, minimum payments are generally so low that new charges will likely add to their debt.
In short, a one-month decline in consumer debt does not mean Americans have solved their borrowing problem. Getting control of that problem will take:
- A sustained reduction in borrowing — especially by those already struggling to make payments.
- Paying down accounts more aggressively, rather than just making the minimum payment.
- Making better choices about avoiding high-cost debt.
- A greater awareness of how much an unhealthy credit score can cost you.
What this debt dip is really telling us
February’s debt decline is unusual but not necessarily encouraging. It may signal financial strain rather than improved money habits. The overall trend remains worrisome, with credit card delinquencies rising and more people making only minimum payments. Real progress will take more than a single dip. It requires better borrowing decisions, steady repayment, and a clearer understanding of how debt and credit scores impact long-term financial health.
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Disclaimer: The article and information provided here are for informational purposes only and are not intended as a substitute for professional advice.
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