{"id":42623,"date":"2026-03-31T12:24:03","date_gmt":"2026-03-31T12:24:03","guid":{"rendered":"https:\/\/financialrush.com\/?p=42623"},"modified":"2026-03-31T12:24:03","modified_gmt":"2026-03-31T12:24:03","slug":"credit-card-aprs-have-a-meaningful-impact-on-spending","status":"publish","type":"post","link":"https:\/\/financialrush.com\/?p=42623","title":{"rendered":"Credit card APRs have a ‘meaningful’ impact on spending"},"content":{"rendered":"

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Because of the extremely high interest rates<\/a>, credit cards<\/a> are one of the most expensive ways to borrow money. <\/p>\n

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. <\/p>\n

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

On average, a 1 percentage point increase in the annual percentage rate, or APR, on a credit card leads\u00a0to\u00a0a roughly 9% drop in\u00a0credit card spending\u00a0the following month \u2014 which is an \u201ceconomically meaningful response,\u201d the researchers found. <\/p>\n

When borrowing becomes more expensive and consumers spend less on their cards, they also reduce their debt burden, the report found.<\/p>\n<\/div>\n

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Read more CNBC personal finance coverage<\/h2>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n
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\u201cIt appears that many people do slow spending to the extent they can when interest rates go up,\u201d said Ted Rossman, senior industry analyst at Bankrate.\u00a0<\/p>\n

\u201cWe\u2019re seeing a similar phenomenon with gas prices<\/a> \u2014 there\u2019s evidence that many people are driving less and combining trips when possible due to recent price increases,\u201d he said. \u201cConsumer spending, therefore, may be more rational than a lot of people realize.\u201d<\/p>\n<\/div>\n

How the Fed affects your credit card rate<\/h2>\n
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Generally, credit card rates are closely pegged to the\u00a0prime rate<\/a>, which is the rate that banks charge their most creditworthy customers \u2014 typically 3 percentage points above the federal funds rate, which is set by the Federal Reserve\u2019s Federal Open Market Committee.<\/p>\n

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.<\/p>\n

Following the Fed\u2019s 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. <\/p>\n<\/div>\n

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Despite some reports<\/a> showing that cardholders who carry a balance don\u2019t know the interest rate they\u2019re being charged, \u201cthis 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,\u201d said Matt Schulz, chief credit\u00a0analyst at LendingTree. \u201cThat\u2019s a good thing.\u201d <\/p>\n

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. <\/p>\n<\/div>\n

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\u201cFinancially constrained consumers \u2026 are most responsive,\u201d said Falk Brauning, an economist at the Federal Reserve Bank of Boston and co-author of the report. <\/p>\n

For those who carry a balance, a 1 percentage point increase in the APR reduces spending by as much as 15% the following month, largely because these borrowers likely have fewer financial resources and limited access to alternative forms of credit, Brauning said. \u201cBeing a revolver or not is very much correlated to your financial status.\u201d<\/p>\n

Alternatively, those who pay off their balance in full at the end of the month do not respond significantly to interest rate changes, the Boston Fed found. \u201cThis finding is intuitive: If you are not paying interest, a higher interest rate does not directly increase the cost of your purchases,\u201d the report said.<\/p>\n

\u201cThere\u2019s also a strong K-shaped economy take on this: It\u2019s upper-income households powering the economy forward, even as lower- and middle-income households cut back,\u201d Rossman said.<\/p>\n<\/div>\n

The Fed\u2019s next move<\/h2>\n
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Since December, the federal funds rate<\/a> has remained steady in a target range of 3.5% to 3.75%, and credit card rates have barely budged. Futures market pricing is implying\u00a0almost no chance of a rate cut at the next meeting in April, according to the CME Group\u2019s\u00a0FedWatch<\/a>\u00a0gauge.\u00a0In fact, the central bank is largely expected to stay on hold through the first half of the year. <\/p>\n

At the same time, soaring energy costs and rising concerns about stagflation<\/a> are pushing markets to consider that the Fed\u2019s next move could be a rate hike<\/a>.<\/p>\n

As recently as Friday morning,\u00a0traders in the futures market raised the probability of a rate increase by the end of 2026, according to the CME Group\u00a0FedWatch\u00a0tool. <\/p>\n

On Monday, Fed Chair Jerome Powell<\/a> said that \u201cinflation expectations do appear to be well anchored,\u201d so the central bank doesn\u2019t need to raise rates just yet<\/a>.<\/p>\n

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