The Boston Fed study finds that the annual interest rate on credit cards has a significant impact on consumer spending.

In the current high-interest-rate environment, credit cards have become one of the most expensive forms of borrowing. Despite this, many cardholders still choose to roll over part of their balance to the next month to keep using it. According to data from the Federal Reserve Bank of Boston, at least one-third of credit card users engage in this type of revolving debt behavior.

However, a recent research paper published by the Federal Reserve Bank of Boston shows that when credit card interest rates change, cardholders are not merely passively affected—they actively adjust their spending behavior. This finding offers an important perspective for understanding consumers’ rational responses to high interest rates.

Credit card spending averages a 9% drop for every 1 percentage point increase in interest rates

Researchers found that for every 1 percentage point increase in the credit card annual percentage rate (APR), the credit card spending amount in the following month decreases by an average of about 9%. The researchers deem this magnitude to be economically significant, indicating that consumers are relatively sensitive to changes in borrowing costs.

The report further notes that when borrowing becomes more expensive and consumers reduce their credit card spending, their overall debt burden correspondingly eases, a mechanism that shows that monetary policy has a direct effect on household consumption and debt levels

Ted Rossman, senior banking industry analyst at Bankrate, said that when interest rates rise, many people slow down their spending as much as possible. He added that this phenomenon also exists when gasoline prices rise: there is evidence that the recent increase in oil prices has led many people to drive less and consolidate trips whenever they can. Therefore, consumer spending may be more rational than many people think.

How Fed policy transmits directly to credit card interest rates

Credit card interest rates are usually closely tied to the prime rate, which is generally about 3 percentage points higher than the federal funds rate set by the Fed. When the Fed adjusts rates, the prime rate moves accordingly, and credit card interest rates often adjust in response within one or two billing cycles.

After multiple rate hikes by the Fed in 2022 and 2023, the average credit card interest rate rose from a little over 16% to above 20%, and then reached a historical high in 2024. Since then, rates have fallen slightly; the current average is about 19.58%.

Although some reports suggest that some carried-balance cardholders do not know the interest rate level they actually face, Matt Schulz, chief credit analyst at LendingTree, said that this latest data shows that carried-balance cardholders are very sensitive to changes in credit card interest rates, and they adjust their behavior at least to some extent when rates change. He believes this is a positive development.

Clear differences in how different groups respond to interest rate changes

Falk Brauning, an economist at the Federal Reserve Bank of Boston, said that consumers with tighter financial conditions respond most strongly to interest rate changes. For cardholders who carry balances every month, when the annual interest rate rises by 1 percentage point, their spending next month can decrease by as much as 15%. He added that this is mainly because these borrowers have relatively limited financial resources and find it difficult to access other credit channels. He emphasized that whether someone is a revolving-debt user is highly correlated with their overall financial situation.

By contrast, cardholders who pay off their credit card balance in full every month do not show a significant response to interest rate changes. The report explains that if cardholders do not have to pay interest, a higher interest rate does not directly increase their purchase costs—an outcome consistent with intuitive logic.

Ted Rossman further analyzed that this pattern also reflects a clear “K-shaped” economic dynamic: even if middle- and lower-income households are cutting spending, higher-income households continue to push the economy forward.

Uncertainty remains about the Fed’s next policy direction

Since last December, the federal funds rate has remained within the target range of 3.5% to 3.75%, and credit card interest rates have also stayed largely steady. According to the Fed Watch tool from the CME Group, the futures market currently indicates that the probability of a rate cut at the next meeting (April) is nearly zero. The market widely expects the Fed to continue holding rates unchanged in the first half of this year.

At the same time, a sharp rise in energy costs and heightened concerns about stagflation are prompting some market participants to consider whether the Fed’s next move could be a rate hike. Early last Friday morning, futures traders even raised the probability of a rate hike by the end of 2026.

However, on Monday (March 30), Fed Chair Powell said that inflation expectations currently appear to be well anchored, so the central bank does not need to take rate-hike action for now.

In summary, although credit card interest rates are at relatively high levels, the latest research shows that cardholders—especially consumers who carry balances—respond to rising interest rates in a relatively rational way, by proactively reducing spending to ease their debt burden. This finding helps better understand consumers’ behavior patterns in a high-interest-rate environment. Meanwhile, the Fed’s future policy direction will continue to have an important impact on credit card interest rates and household consumption.

Investors and ordinary cardholders should continue to watch the Fed’s decision signals, as well as changes in external factors such as energy prices, so they can make financial plans in advance. In the current complex economic environment, rational consumption and prudent borrowing are particularly important.