Fixed vs. Variable Credit Card Interest Rate

Understanding the Difference Between Variable APR and Fixed APR

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Most credit cards give you the choice of carrying a balance or paying in full, with the condition that you’ll pay interest on any balance you carry beyond the grace period. That interest—assessed in the form of a finance charge—is calculated based on the credit card’s interest rate, which is variable or fixed.

The vast majority of credit cards you’ll encounter have variable interest rates. Understanding the type of interest rate you have can help you know when to expect interest rate changes.

What Is a Variable Interest Rate?

A variable interest rate, also known as a variable APR, is an interest rate that can change over time. These are tied to another interest rate, known as an “index rate,” which tends to rise and fall along with the economy.

When the Federal Reserve raises or lowers interest rates, a change to your credit card rate will typically follow, as most issuers calculate rates based on general market rates. 

If you have a variable interest rate card and the index rate increases, the credit card issuer does not have to notify you before the rate change is implemented.

Most variable interest rates are a certain number of percentage points above the index rate. The difference between the two rates is called a “margin.”

For example, if the margin is 14.49% and the index rate is 3%, your credit card APR would be 17.49%.

If you have a variable interest rate, your credit card agreement will describe the margin and the index used to calculate your APR. Paying attention to the index rate will give you a clue about how your credit card rate will move.

What Is a Fixed Interest Rate?

A fixed interest rate, or fixed APR, is more stable over time. It doesn’t change based on an index rate, but it can change for other reasons.

For example, your issuer can change a fixed interest rate on existing balances without notice when:

  • You're more than 60 days late on your credit card payment.
  • You had a promotional rate that ended.
  • You completed a debt management program.
  • Your Servicemembers Civil Relief Act interest reduction ended.

With a fixed interest rate credit card, your credit card issuer must give you 45 days of advance notice before the increase becomes effective.

Once you receive the interest rate increase notification, you're allowed to opt-out of the interest rate increase and pay off your balance at the old interest rate. You don’t have to accept the rate increase, but your credit card issuer may close your credit card if you choose to opt-out.

Having a closed credit card could hurt your credit score by affecting your overall credit utilization, which compares your credit card balances to your available credit.

If you don't opt-out, the issuer applies the new interest rate to new purchases starting 14 days after the notice is sent.

Is a Fixed Rate Better Than a Variable Rate?

The biggest advantage of a fixed interest rate is that your credit card issuer typically has to notify you before raising your rate. You then have the opportunity to opt-out if you feel that rate is too high.

A variable interest rate gives you a chance to save money on interest when rates go down, but you can’t reject a rate increase if you feel it’s too high.

Having a card with a fixed APR does not necessarily mean you will be paying a lower rate than you would on a card with a variable APR. Depending on the index rate, you could pay lower interest at some points and higher interest at others.

While you can’t control the type of interest rate you have—the credit card issuer determines it—you can control the amount of interest you pay by paying off credit card purchases during your credit card’s grace period.

Some credit cards offer a payment plan feature that allows you to pay off purchases or take out a loan and repay with fixed installment payments. These options give you a more predictable payment schedule while keeping your interest rate fixed.

Key Takeaways

  • Most credit cards have a variable interest rate, which changes based on an underlying index rate.
  • Fixed interest rates can change but the credit card issuer has to give advance notice of the rate increase (unless an exception applies).
  • You can save money on interest by paying your balance in full each month.