Credit Card Interest Rates: Fixed Rate vs. Variable Rate

What's the Difference Between Fixed Rates and Variable Rates

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The convenience of carrying a balance on your credit card comes at a cost - interest on any balance you carry past the grace period. The interest rate for your credit card is set the moment you're approved for a credit card.

Credit cards have two types of interest rates: fixed or variable. The difference between the two will affect when your interest rate can change and whether you have to be notified before your credit card issuer changes your rate.

What Is a Fixed Interest Rate?

A fixed interest rate generally remains the same the entire time you have your credit card. There are some circumstances when a fixed interest rate can change.

  • You're more than 60 days late on your credit card payment
  • You had a promotional rate that has ended
  • You’ve just completed a debt management program

If your credit card has a fixed interest rate, your rate cannot increase within the first year of opening our account unless it's for one of the reasons listed above.

Before your credit card issuer can raise your interest rate, they must give you 45-days 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. Opting-out gives you a chance to repay your balance at the old interest rate.

The chart below shows the difference in fluctuation between a fixed interest rate versus a variable rate, spanning from 2000–2019.

What’s Different About a Variable Interest Rate?

A variable interest rate can change and your credit card issuer doesn't have to notify you. A variable rate is tied to another interest rate, known as an index rate, usually one that moves with the economy.

The variable interest rate is a certain number of percentage points above the index rate. (The difference between the two rates is called a margin.) For example, the variable interest rate on your credit card might be prime + 13.79%. In that case, the margin, 13.79%, is added to whatever the prime rate is at the time to come up with your interest rate. The Prime rate is currently 5.50%, making your interest rate 19.29%.

Your variable interest rate will go up and down as the underlying rate goes up and down. Credit card issuers don’t have to send you an advance notice when your variable interest rate goes up because the underlying rate has gone up. You won’t know if your interest rate has changed unless you pay attention to your credit card billing statement. If your credit card issuer increases the margin portion of your variable interest rate, the fixed interest rate increase rules apply. Your card issuer will be required to notify you in advance of the chance, giving you the chance to opt-out.

Is a Fixed Rate Better Than a Variable Rate?

The primary benefit of a fixed interest rate is the requirement of advance increase and the ability to opt-out of an interest rate increase. Opt-outs may save a few dollars in interest charges, but they can hurt your credit. With variable interest rates, you can find out when your interest rate will be increasing if you pay attention to news about when the Feds are increasing interest rates.

You can avoid paying interest completely by paying your balance in full at the end of each month. That way, it won’t matter whether your interest rate is fixed or variable.