Credit card APRs have an ‘economically meaningful’ impact on consumer spending, Boston Fed finds

Because of the extremely high interest rates, credit cards are one of the most expensive ways to borrow money.

Even so, at least one-third of credit card users carry a balance from one month to the next, according to the Federal Reserve Bank of Boston.

However, a new paper published by the Boston Fed found that when credit card interest rates change, cardholders adjust their spending accordingly.

On average, a 1 percentage point increase in the annual percentage rate, or APR, on a credit card leads to a roughly 9% drop in credit card spending the following month — which is an “economically meaningful response,” the researchers found.

When borrowing becomes more expensive and consumers spend less on their cards, they also reduce their debt burden, the report found.

“It appears that many people do slow spending to the extent they can when interest rates go up,” said Ted Rossman, senior industry analyst at Bankrate. 

“We’re seeing a similar phenomenon with gas prices — there’s evidence that many people are driving less and combining trips when possible due to recent price increases,” he said. “Consumer spending, therefore, may be more rational than a lot of people realize.”

How the Fed affects your credit card rate

Generally, credit card rates are closely pegged to the prime rate, which is the rate that banks charge their most creditworthy customers — typically 3 percentage points above the federal funds rate, which is set by the Federal Reserve’s Federal Open Market Committee.

When the Fed raises or lowers rates, the prime rate moves as well, and the interest rate on that credit card debt is likely to follow within a billing cycle or two.

Following the Fed’s rate hikes in 2022 and 2023, the average credit card rate rose from just over 16% to more than 20%, reaching an all-time high in 2024. APRs have since edged down to around 19.58%, on average, according to Bankrate.

Despite some reports showing that cardholders who carry a balance don’t know the interest rate they’re being charged, “this data shows me that people who carry a balance are acutely aware of the interest rates on their credit cards and adjust their behavior, at least to some degree, when those rates change,” said Matt Schulz, chief credit analyst at LendingTree. “That’s a good thing.”

According to the Federal Reserve Bank of Boston, a 9% decline in spending due to a 1 percentage point higher APR amounts to about $74 less per month in credit card charges. However, these changes do not happen across the board.