Variable vs. Fixed Rate Credit Cards

A credit card interest rate is the annual cost of carrying a credit card balance. While there are several different types of interest rates – penalty interest rate, default interest rate, interest rate for purchases – there are two basic ways to classify interest rates: fixed and variable.

Fixed interest rates remain the same unless the credit card issuer sends advance notice of the interest rate increase. Variable interest rates, on the other hand, can change without notice from the credit card issuer. While both interest rates can change, but the major difference between the two is when the change can happen and whether you have to be notified of the change.

Variable Interest Rate

A variable interest rate on a credit card is one that’s based on another underlying interest rate. Often variable interest rates are based on the U.S. prime rate, which is the interest rate banks give to their best customers. The variable rate is usually a percentage over the prime rate. For example, if your variable rate is 14.9% + prime, and the prime rate is 3%, your interest rate will be 17.9%.

Variable interest rates can change whenever the underlying interest rate changes. When the prime rate goes up, your interest rat will also go up. On the plus side, your interest rate will go down when the prime rate goes down. The credit card issuer doesn’t have to notify you in advance of these interest rate changes. You might not notice an interest rate increase unless you pay attention to movement in federal interest rates or you watch your credit card billing statement.

Fixed Interest Rate

A fixed interest rate is one that isn’t based on an underlying interest rate. Fixed interest rates can change. However, credit card issuers have to follow certain rules when they increase a fixed interest rate.

You generally have to be notified 45 days in advance of an interest rate increase. You must also be given the opportunity to opt-out of the interest rate change. By opting-out, you’re saying that you don’t want to pay the higher interest rate. If you opt-out, the credit card issuer will let you pay off your balance at the old rate, but your account may be closed.

Fixed or Variable: Does it Matter?

Fixed interest rates are more consistent and predictable. If your interest rate increases, you’ll know about it in advance and have the chance to reject the new interest rate if you don’t like it. However, fixed interest rate credit cards aren’t as commonplace as they were a few years ago.

These days, most credit card offers are for variable interest rates. While you won’t receive advance notice of changes to a variable interest rate, you do know when you accept the credit card that it’s interest rate can change without notice.

If you pay your balance in full each month, it doesn’t matter much whether you have a fixed or variable rate because you’ll never pay interest either way. Even when you carry a balance, a variable interest rate isn’t bad unless it’s high.