Higher borrowing rates contributed to a significant rise in the subprime credit card delinquency rate over the last couple of years.
However, as of January 2025 the subprime delinquency rate has declined for two consecutive months, although it remains elevated.
While the subprime delinquency rate climbed by 7.4 percentage points during the monetary tightening cycle that began in March 2022, it has fallen since November 2024.
The rise and subsequent fall in the subprime delinquency rate has mirrored movements in subprime borrowing rates.
Subprime borrowers consistently pay higher annual percentage rates than prime borrowers due to differences in relative creditworthiness; however, this gap widened throughout 2023 as subprime rates rose more steeply than prime rates.
More recently, this gap has begun to narrow: Subprime APRs have gradually declined, while prime APRs have only modestly declined.
This relative drop in borrowing rates could be related to the drop in subprime delinquencies, though it is difficult to parse demand and supply effects.
Examining the payment activity of credit card users may help untangle whether demand for credit has changed – and thus why credit card APRs have changed.
From 2022 to 2023, purchase activity grew faster among subprime borrowers (purple line) than prime borrowers (blue line); however, growth in subprime purchases declined in 2024 and turned negative as of January 2025. [See accompanying chart.] Thus, throughout the sample, periods of higher purchase activity were coupled with higher borrowing rates and vice versa. This relationship suggests the recent drop in subprime APRs may be a response to subprime borrowers’ lower demand for credit card financing.
In summary, since monetary policy tightening began in March 2022, the cost of borrowing has risen dramatically for many consumer financial products, especially credit cards.
This period of rising borrowing costs was marked by a dramatic increase in subprime borrower delinquency rates, although that trend has reversed since November 2024.
While a lower annual percentage rate and lower delinquency rate appear to be positive developments for subprime borrowers, they likely reflect a drop in demand for credit among these borrowers. Thus, whether these developments are truly positive will depend on the cause of the drop in demand.
Jordan Pandolfo is an economist at the Federal Reserve Bank of Kansas City.