Credit card holders may be more sensitive to changes in interest rates than commonly assumed. Data reveals that, on average, a 1 percentage point increase in a borrower’s annual percentage rate leads to an almost 9% drop in credit card spending the following month.
Researchers at the Boston Federal Reserve describe this adjustment as an “economically meaningful response.” In practical terms, a 1 percentage point increase in APR translates to roughly $74 less in monthly card spending.
Effects in Different Situations
However, this effect is not uniform. The impact of interest rate changes depends on whether the cardholder carries a balance, as well as their credit score. Among accounts that carry balances, a 1 percentage point increase in APR reduces spending by about 15% in the following month—nearly double the overall average effect. By contrast, spending by cardholders who pay off their balances in full each month shows little sensitivity to interest rate changes.
Still, individual responses can vary and may shift from month to month.
“We wonder about how strategic revolvers really are,” said Brian Riley, Director of Credit at Javelin Strategy & Research. “The Fed suggests a connection between interest rate increases and spending declines, but that oversimplifies what actually happens. If consumers were more strategic, we probably would not have revolving debt in excess of $1 trillion at 20.97%. In many cases, the car breaks down, the child needs medical attention, or the household budget is out of whack. Those are core drivers of revolving debt.”
Credit Scores and Other Factors
The researchers also found similar variation by credit score. Borrowers with lower credit scores reduce their spending by about 18% when APR rises by 1 percentage point, while spending among higher-credit-score borrowers changes very little.
Instead, higher-credit-score consumers tend to adjust by paying down debt, reducing their outstanding balances by about 7%. In contrast, lower-credit-score consumers primarily respond to higher rates by cutting back on spending.
Additional factors may also influence how consumers respond to interest rate changes, and remain an area for further study.
“It would have been interesting to understand the relationship between spending and interest rates, broken out by credit line utilization,” Riley said. “Are some segments blocked from spending because they have maxed out lines?”
