What Is the Difference Between Fixed and Variable Credit Card Interest Rates?

What Is the Difference Between Fixed and Variable Credit Card Interest Rates?

There are other factors besides only your interest rate

If you carry a debt on your credit card through the grace period and don’t pay it off in full each month, you’ll be charged interest. The finance fee, which is used to represent the interest, is computed using the credit card’s interest rate, which may be variable or fixed.

The majority of credit cards you’ll likely use have variable interest rates, but there are some key differences between the two. Knowing what kind of interest rate you have will assist you anticipate any changes in interest rates.

What’s the Difference Between Fixed and Variable Interest Rates?

Fixed Interest Rate Variable Interest Rate
Usually stays the same Changes over time
Tied to your payment history, promotions, etc. Tied to the economy’s index rate
Credit card issuer must notify you of any rate increase Credit card issuer does not need to notify you of rate change

How the Rate Is Determined

Although a fixed interest rate or fixed APR can change for various reasons, it is not dependent on an index rate.

Your issuer, for instance, has the right to abruptly alter a set interest rate on outstanding balances in the following situations:

  • Your credit card payment is over 60 days overdue.
  • You had a discounted pricing, but it expired.
  • You’ve finished a debt-management course.
  • The interest decrease under the Servicemembers Civil Relief Act has stopped.

While a variable interest rate fluctuates over time. These are correlated to another interest rate, referred to as a “index rate,” which fluctuates in line with the overall state of the economy. Your credit card rate will often vary when the Federal Reserve changes interest rates because the majority of issuers base their rates on current market rates.

The majority of variable interest rates are set at a particular percentage point higher than the index rate. “Margin” refers to the difference between the two rates. Your credit card’s APR would be 17.49 percent, for instance, if the margin was 14.49 percent and the index rate was 3 percent.

Your credit card agreement will outline the margin and the index used to compute your APR if your interest rate is variable. You can predict how your credit card rate will change by keeping an eye on the index rate.

Rate Change Notifications

If you have a credit card with a fixed interest rate, your credit card issuer is required to give you 45 days’ notice before an increase takes effect.

You have the option to opt out of the interest rate increase and settle your debt at the previous interest rate after receiving the interest rate increase notification. Your credit card issuer may close your credit card if you decide not to accept the rate hike, but you are not required to.

Your overall credit usage, which compares your credit card balances to your available credit, may be impacted by having a closed credit card, which could lower your credit score.

If you don’t choose to opt out, the issuer will start using the new interest rate on new purchases 14 days after sending you the notice.

However, if you have a credit card with a variable interest rate and the index rate rises, the credit card company is not required to let you know before the rate change takes effect. This is so because it’s anticipated that variable interest rates would fluctuate regularly over time.

Which Is Right for You?

Remember that the credit card company sets your interest rate, which means that you have no control over whether it is fixed or variable. By paying off credit card purchases during the grace period on your credit card, you can manage the amount of interest you pay.

A payment plan option on some credit cards lets you make purchases or borrow money and repay it with set installment installments. With these choices, your interest rate is fixed and your payment schedule is more predictable.

The main benefit of a fixed interest rate is that your credit card company is usually required to give you advance notice before raising it. You then have the choice to opt-out if you think that rate is too high.

With a variable interest rate, you can benefit from lower interest costs when they occur but you cannot refuse an increase in rates if you believe they are too high.

A fixed APR credit card does not guarantee that the interest rate you pay will be less than that of a variable APR card. You might pay lower interest at some points and higher interest at others, depending on the index rate.

The Bottom Line

When using credit cards, you may be subject to both fixed and variable interest rates.

The interest rates for the majority are variable, which means they fluctuate in accordance with an economic index rate. On the other side, those with fixed interest rates don’t alter as regularly. Your credit card company must alert you in advance if they do. The issuer of a credit card with a variable interest rate is not required to notify you when the rate changes.

No matter what kind of interest rate your card has, paying off your balance in full each month is the easiest approach to avoid accruing interest.

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