Americans are entering the new year with their debt at record highs. It’s no coincidence that the Federal Reserve signaled tighter conditions for interest rate cuts in 2026 at its December meeting, potentially denying much-needed relief to millions of Americans who rely on loans.
Household debt soared to a record $18.6 trillion in the third quarter of 2025, and the central bank is expected to cut its benchmark interest rate just once or twice next year in a bid to ease borrowing costs.
But this slow and steady approach means 2026 won’t be the year of relief many borrowers are hoping for. Instead, a sluggish job market and sky-high home prices are expected to keep first-time buyers out of the market.
But even if the Fed moves slowly to help borrowers significantly, those with high-interest credit card or auto debt can take action in the new year by trying to improve their credit scores and refinance their loans.
Household debt at record high
Americans will enter the new year leaning more heavily on debt than ever before. Of the trillions of dollars in household debt recorded last quarter, the majority of it — $13.07 trillion — was mortgage balances, according to the New York Federal Reserve’s Household Debt and Credit Policy Report.
Non-mortgage balances rose 1% from the second quarter to the third, with credit card and auto balances reaching $1.23 trillion and $1.66 trillion, respectively.
With new car prices still far above what most Americans can afford to pay in cash, delinquencies on auto payments are expected to rise for the fifth straight year in 2026, according to TransUnion’s 2026 Consumer Credit Forecast, though the increases are expected to be smaller over time.
The report estimates that delinquencies on credit cards will remain relatively stable, while delinquencies on mortgages will rise due to a mild increase in unemployment.
Risks and Accuracy
Taking these numbers in isolation can be misleading. The widening “K-gap” in the credit market means that the financial strain on lower-income households is being masked by the growing wealth of wealthier borrowers, who have benefited from the stock market boom and rising home values.
Because low- and middle-income households have been particularly sensitive to inflation in recent years, lenders have tightened their lending standards. The labor market in the new year will be the main factor determining how difficult it will be to approve loans. If the labor market continues its course, without a significant increase in layoffs, lenders are likely to keep their standards as they are. But if the macroeconomic situation worsens, then yes, lenders are expected to tighten further.
If there are rate cuts in 2026…
A significant cut in the federal funds rate looks less certain in the new year, but it’s not entirely unlikely. Fed Chairman Jerome Powell’s term ends in May, and Fed Governor Christopher Waller, who is on Donald Trump’s shortlist to become the next Fed chairman, has said there is room for a 50-100 basis point rate cut.
If rate cuts do happen, consumers should be ready to take advantage.
Mortgages
Mortgage loans are the loans where borrowers could see the biggest interest savings if interest rates fall in the new year.
For the average new loan of about $370,000 at a 6.3% interest rate, a 25 basis point reduction would save borrowers $929 in interest over a year, according to TransUnion calculations.
A 1 percentage point reduction (100 basis points) would save $3,715. Mortgage rates fell in 2025, but remain significantly higher than in 2021, when interest rates had fallen below 3%.
It is important to note that mortgage rates do not directly track the Fed’s benchmark rate, but move in line with the yield on the 10-year U.S. Treasury note.
Auto Loans
A 25 basis point reduction on a $30,000 auto loan with an interest rate of 7.64% would save drivers only $74 a year, while a 100 basis point reduction would reduce annual interest payments by $295, according to TransUnion data.
Credit Cards
Credit card rates are directly affected by the federal funds rate, more so than mortgages and auto loans.
But even if the Fed cut interest rates by a full percentage point, a credit card holder with the average balance — which was about $6,500 in the third quarter of this year — and an interest rate of 22.83% would save only $65 in interest per year.
