MW Americans are starting the new year with record debt. Here's how they can get it under control.
By Genna Contino
This is how much money borrowers could save if interest rates fall in 2026
Americans looking to pay down their debt in the new year are facing a stagnant job market, sticky inflation and an uncertain Fed policy. Still, there are ways they can take control of their borrowing in 2026.
The Federal Reserve signaled a higher bar for 2026 interest rate cuts at its December meeting, potentially snatching away a much-needed reprieve for millions of Americans saddled with debt.
Household debt ballooned to a record $18.6 trillion during the third quarter of 2025, and the central bank is expected to lower its benchmark rate just once or twice next year to soften borrowing costs.
But this slow-and-steady approach means 2026 won't be the year of relief many borrowers are hoping for. Instead, a stagnant job market and sky-high home prices are expected to keep first-time buyers sidelined. But even if the Fed is moving too slowly to significantly help borrowers, experts say those carrying high-interest credit-card or auto debt can still take proactive action in the new year by working to improve their credit scores and refinancing loans.
Read more: Is the economy losing jobs? The Fed's rate cut hints at bigger worries.
"Regardless of what happens this year, I think it's always important for people to remember that they have more power over these things than they think they do," said Matt Schulz, chief consumer finance analyst at LendingTree (TREE). "Whether it's balance-transfer cards or debt-consolidation loans or going to a credit counselor or calling your credit-card issuer and asking for a lower interest rate."
Household debt is at an all-time high heading into 2026
Americans will head into the new year relying on debt more than ever before. Of the trillions of dollars of household debt recorded last quarter, the majority of it - $13.07 trillion - was in mortgage balances, according to the Federal Reserve Bank of New York's report on household debt and credit. Nonhousing balances increased 1% from the second quarter to the third quarter, with credit-card and auto balances sitting at $1.23 trillion and $1.66 trillion, respectively.
With new car prices still far higher than most Americans can pay in cash, car-loan delinquency rates are expected to rise for the fifth straight year in 2026, according to TransUnion's (TRU) 2026 consumer-credit forecast, though increases have become progressively smaller. The report estimates that credit-card delinquencies will remain relatively stable, while mortgage delinquencies will tick up due to a modest rise in unemployment.
'Inflation remains too high': Two Fed dissenters who rejected latest interest-rate cut explain why.
Looking at those numbers in isolation can be misleading. A deepening "K-shaped" divide in the credit market means that the financial strain on lower-income households is being masked by the surging wealth of affluent borrowers who have benefited from a booming stock market and rising home equity.
Because low- and middle-income households have been particularly sensitive to inflation over the past few years, lenders have tightened underwriting standards, according to Warren Kornfeld, a senior vice president of financial institutions at Moody's $(MCO)$. In the new year, he said, the job market will largely influence how difficult it is to get approved for a loan.
If the job market continues on its current path, where there is weakening without a "material rise" in layoffs, lenders would be likely to keep their lending standards where they are, Kornfeld said. "But if the macro outlook does get worse, then yes, you expect the lenders to tighten."
Read more: Trump administration moves to scrap Biden-era student-loan repayment plan
Student-loan balances rose by $15 billion, to $1.65 trillion, in the third quarter of 2025, according to New York Fed data - and paying off those balances could become harder in the new year. Interest payments resumed for millions of borrowers in August, and the Trump administration has announced plans to scrap Biden-era repayment assistance, leaving many in limbo.
If the Fed does cut rates in 2026, here's how much borrowers could save on interest
A significant slashing of the federal-funds rate is looking less certain for the new year, but it's not entirely out of the question. Fed Chairman Jerome Powell's leadership term ends in May, and Fed governor Christopher Waller, who is on President Donald Trump's shortlist to become the next Fed chair, said there is room to cut rates by 50 to 100 basis points.
Read more: Fed's Waller thinks inflation will start to fall in next 3-4 months and rates can come down at moderate pace
If the rate cuts do come, "consumers need to be prepared to take advantage of them," said Michele Raneri, vice president and head of U.S. research and consulting at TransUnion. "You might see that there's good interest rates out there, but if you don't have a good enough credit score to get through the door ... then you're not going to get it."
Here's how much borrowers could save on interest in a year for different types of loans if rates drop in 2026:
Mortgages
Home loans are where borrowers could see the most significant savings on interest if rates drop in the new year. For the average new loan amount of around $370,000 with 6.3% interest, a 25-basis-point cut could save homeowners $929 in interest in a year, according to TransUnion calculations. A 1-percentage-point cut (100 basis points) would mean $3,715 in savings.
Mortgage rates have decreased in 2025, but remain significantly elevated from 2021, when rates fell below 3%. It's important to note that mortgage rates don't directly follow the movement of the Fed's benchmark short-term interest rate, but instead move in tandem with the yield on the 10-year Treasury note.
Read more: Should you refinance now? This could be the Fed's last rate cut for a while.
Even if mortgage rates continue to fall, "affordability will still be a concern for first-time home buyers and buyers looking to move up from their starter homes," said Brian Grzebin, president of mortgage banking at Univest Bank and Trust $(UVSP)$.
The majority of homeowners are "locked in" at rates around 4% or below, according to Kornfeld, making them unlikely to move or refinance anytime soon. But about 20% of homeowners have rates above 5%, he said, and could benefit from refinancing in 2026.
Auto loans
A 25-basis-point cut for a $30,000 car loan with a 7.64% APR would save drivers just $74 a year, while a 100-basis-point cut would cut $295 in annual interest payments, the TransUnion data show.
Read more: Is now a good time to refinance your car loan? Here's how to tell.
For those looking to refinance their auto loan, it's important to pay attention to the loan terms. Stretching out the loan just to lower monthly payments could increase the amount of overall interest paid. As the car gets older, its value depreciates - leading to borrowers paying more than the market value of their vehicle.
Credit cards
Credit-card APRs are more directly influenced by the federal-funds rate than home and auto loans are. But even if the Fed cut rates by a full percentage point, a cardholder carrying the average balance - which was about $6,500 as of the third quarter of this year - and a 22.83% APR would only save $65 on interest in a year.
Not ready to refinance yet?
If buying a new home or car or refinancing a loan isn't in the cards for you in 2026, being intentional about improving your credit score in the new year can go a long way, Raneri said.
"People who are sitting on the sidelines to buy a new house or to get into a house as a first-time home buyer, it's really important to get the best credit score because that's the biggest purchase that you'll ever make," she said.
Read more: Try this 30-second trick to keep your holiday spending from wrecking your credit score
To do that, first get any delinquencies in the rearview mirror and continue to pay the minimum balance on time. "You don't have to pay extra, but you can't have anything be delinquent," if you want your score to improve, Raneri said.
Second, don't max out any credit cards. A good rule of thumb is to keep you credit-utilization ratio below 30% - meaning the balance stays under 30% of the available credit. The lower that number, the better. It's also important not to apply for a bunch of new credit cards and loans during this improvement period, as this can negatively affect a credit score.
Beyond improving credit, there is also power in simply asking. If you're looking to cut interest costs on a credit card, you can call your card company and ask for a lower APR - the worst they could say is no.
Of those who asked for a lower interest rate in the past year, 83% were successful, according to a LendingTree survey. Cardholders also had significant success asking for waived or reduced annual fees, waived late fees and higher credit limits.
Read more: My credit-card APR is 27%. Here's what happened when I asked my bank to lower it.
If you have a substantial balance on a high-interest credit card, consider a balance-transfer card. But this only works when paired with a clear plan to pay off the debt while the APR is 0% during the introductory period, which is usually 12 to 15 months.
Keep in mind that you would typically need good to excellent credit and a steady income to qualify for a balance-transfer card, which typically comes with a transfer fee of 3% to 5% of the transferred balance. A "good" credit score ranges from 670 to 739, according to Experian (UK:EXPN), while "very good" credit starts at 740 and an "excellent" score is anything above 800.
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December 23, 2025 14:02 ET (19:02 GMT)
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