Variable vs. Fixed Rate Credit Cards: Understand the Difference
Many credit cards come with special introductory rates.
These often include low or 0% interest rates for the first
months or year. But what happens after the introductory
period? This is when most credit cards switch to a variable
or fixed interest rate. Read on to learn the difference
between variable and fixed rate credit cards.
Variable Rate Credit Cards
Variable interest rates are usually tied to another rate.
Many credit card companies use the Prime lending rate as an
index. This is the rate at which top banks in the United
States can borrow money from the Federal Reserve. Creditors
also may calculate variable interest rates based on the
Treasury bill.
The credit card lender adds a number of percentage points,
known as the margin, to the index rate. This new rate is
then passed on to your credit card. In certain cases, the
credit card company may first multiply the index rate by
another number, called the multiple. The new figure is
added to the margin to determine the credit card interest
rate.
As the index rate fluctuates, it affects the rate on your
credit card. The APR (annual percentage rate) on variable
rate credit cards may change at any time. These cards often
include a "floor rate." This is the lowest interest rate
that can be offered.
Fixed Rate Credit Cards
Unlike the variable rate, which is subject to change at any
time, the fixed rate credit card offers one set rate. The
initial rate is sometimes a couple of percentage points
higher than a variable rate. However, the advantage is that
a fixed rate may not change as quickly as the variable rate
credit card.
That said, fixed rates do sometimes change. The credit card
company may include the right to change the rate in the
card plan. According to the Truth in Lending Act, the
lender must provide at least 15 days notice before raising
the rate. So make sure to look through the apparent "junk
mail" you receive. It could include an announcement that
your rate is about to change.
Decide which Rate is Best for You
To decide which rate will fit you best, consider the market
fluctuations. The current average rate for variable rate
credit cards is 14.72%. The average rate on fixed rate
credit cards is 13.33%. Some experts advise getting a fixed
rate credit card for its stability. Others suggest opting
for a variable rate credit card when interest rates are
dropping.
If you are considering a variable rate credit card, first
check to see if there are caps on how high or low the
interest can go. If the lowest possible rate on the card is
16%, and rates are dropping, you may want to look into
other options.
Whether you decide on a variable or fixed rate credit card,
be sure to read through the fine print. This will help you
find rate fluctuation policies. Some card plans will change
the rate after late or missed payments.
If you pay off your balances each month, the interest rate
on your credit card will affect you less. However, if you
regularly carry a balance (and most Americans do), it is
important to understand the difference between variable and
fixed rates. Doing so will ensure you are getting the best
deal on interest charges.
