If you’re using a credit card and you don’t pay off your debt in full every month, you will be subject to interest charges on the portion of the balance that you carry over into the following month. That interest, which comes in the form of a financing fee, is computed based on the interest rate, which can either be variable or fixed, that is associated with the credit card.
There is a good chance that most of credit cards you come across will have variable interest rates; yet, there are some key differences between variable and fixed interest rates. If you are aware of the kind of rate of interest you are paying, you will have a better idea of when to anticipate any changes in the rate.
The Difference Between Fixed and Variable Interest Rates.
A fixed interest rate usually stays constant. It is linked to ones payment history, promotions, etc. Credit card issuer is required to notify you of any increase in rate.
On the other hand, variable interest rate, may change over time. It is tied to the index rate of the economy. Additionally, your credit card issuer is not required to notify you of any rate change.
The Process Behind Establishing the Rate
Although a fixed interest rate, also known as a fixed annual percentage rate (APR), does not vary in response to shifts in an index rate, it may shift for other reasons.
For instance, your card’s issuer has the right to adjust the fixed interest rate it applies to current balances at any time without prior warning when:
You are more than sixty days behind on making a payment on your credit card.
You were eligible for a discounted pricing that is no longer available.
You finished a debt control program.
The decrease in interest rates provided to you by the Servicemembers Civil Relief Act has come to an end.1
On the other hand, a variable interest rate is one that shifts as time goes on. These are linked to a different interest rate, which is referred to as a “index rate,” and it generally moves up and down in tandem with the economy. If your credit card issuer is like most others, they will determine your rate based on the general market rate. This means that if the Federal Reserve changes the interest rates they use, your rate will likely change as well.
The vast majority of variable interest rates are calculated by adding a predetermined number of points to the index rate. The term “margin” refers to the difference in price between the two rates. Your annual percentage rate (APR) on your credit card, for instance, would be 17.49% if the margin was 14.49% and the benchmark rate was 3%.
If you have an interest rate that is variable, the margin and index that are used to compute your annual percentage rate (APR) will be described in your credit card agreement. If you pay close attention to the index rate, you will have a better idea of how the interest rate on your credit card will change.2
Notifications of Rate Adjustments
If you have a credit card with a fixed interest rate, the company that issued the card is required to give you advance notice of any interest rate increases at least 45 days before they take effect.3
After you have been notified that the interest rate will be increased, you have the option to opt out of the increase and continue paying the interest rate that was in effect before the notification was sent to you. You are under no obligation to agree to the higher interest rate, but if you choose to opt out, the company that issued your credit card may cancel your account.
Important
Your overall credit application, which is calculated by comparing the total balances on all of your credit cards to the total amount of available credit, could be negatively impacted if you have a credit card that has been closed.
If you do not exercise your right to opt out of the new interest rate, the issuer will begin applying it to new purchases beginning 14 days following the notice is delivered.
If, on the other hand, you have a credit card with a variable interest rate and the index rate rises, the credit card issuer is not required to provide you with advance notice before changing your rate of interest. This is because it is generally accepted that variable interest rates will shift frequently throughout the course of time.
Which Is the Best Option for You?
Keep in mind that whether you have an interest rate that is either fixed or variable is determined by the company that issued your credit card, and you have no control over it. By paying off purchases made with your credit card while you are still within the grace period for those purchases, you can manage the quantity of interest that you are charged.
Tip
You may be able to pay off items or take out a loan and repay it with fixed monthly installments if your credit card comes with a payment plan function. This feature is offered by some credit cards. Your interest rate will remain the same, despite the fact that these options provide you with a more regular payment plan.
The fact that the issuer of your credit card is required to provide you with advance notice before increasing your interest rate is the primary benefit of having a fixed interest rate. You have the option to opt out of that service if you believe that the rate is excessively expensive.
You have the opportunity to reduce the amount of money you spend on interest when you have a variable interest rate, but you have no choice but to accept any rate increases, even if you believe they are excessive.
If you have a credit card with a fixed annual percentage rate (APR), this is not a guarantee that the rate you pay will be lower than the rate you would pay on a card with an adjustable APR. At some periods, the interest rate you pay could be lower, while at other instances, it could be greater. This would depend on the index rate.
The Crux of the Matter
When it comes to interest rates on credit cards, you could be subjected to either a fixed or a variable rate. Both of these types of interest rates are distinct from one another.
The majority of them have an interest rate that is variable, which indicates that the rate shifts depending on the rate of an economic index. On the other hand, the terms of loans with fixed rates of interest do not fluctuate nearly as frequently. If they do, the company that issued your credit card is obligated to inform you well in advance. Your credit card issuer is not required to notify you in the event that the rate on your variable-interest credit card increases.
Paying up your debt in full every month is the most effective strategy to prevent accruing interest charges, regardless of the sort of interest rate that is used by your credit card company.
