Understand Your Credit Card's Variable Interest Rate

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If your credit card (or loan) has a variable interest rate that means your interest rate will move up and down or vary, based on another interest rate, which is referred to as the index rate. Variable interest rates are often tied to the prime rate, but might also be tied to the treasury bill rate or Libor.

In certain economic conditions, a variable interest rate, or variable APR, is better because it allows you to pay off your credit card or loan balance at a lower cost when the index rate is down.

On the other hand, having a variable interest rate doesn't work in your favor when the index rate rises because your interest rate goes up as well.

Interest rates directly affect the cost of borrowing money. Simple interest is calculated by multiplying the interest rate by your outstanding balance. (Credit card issuers may use a slightly more complex calculation for your interest.) The higher your interest rate, the higher the interest fees you pay. Variable interest rates are beneficial to credit card issuer because the card issuer can raise your credit card rate as market rates change.

The chart below illustrates the difference between credit card interest rates and the prime rate from 2000 through today.

No Warning Before a (Variable) Rate Increase

Credit card issuers aren't required to give advance notice of an interest rate increase if your credit card has a variable interest rate. That means you won't have an opportunity to opt-out or reject, the higher interest rate and you'll have to pay off your balance at the higher interest rate, even if you close your credit card.

If your credit card has a variable rate, it's important to pay attention to any news about the Federal Reserve raising interest rates. Whichever rate your credit card issuer uses as an index for your variable APR will likely be tied to the federal funds rate. The prime rate, for example, is the federal funds rate plus 3%. If the federal funds rate goes up, then you know your credit card rate will soon follow.

How Important Is It That the Rate Varies?

The variable rate matters most for credit cardholders who carry a balance. Your rate can increase without any advanced notice and that means you'll end up paying higher finance charges.

The higher your credit card balance, the more your finance charge will be, which means more of your payment goes toward interest and it takes longer to pay off your balance.

Mortgages have a version of the variable interest rate, known as the adjustable rate. With an adjustable rate mortgage, the interest rate changes on a set time period. When the mortgage rate changes or adjusts, the monthly mortgage payment also adjusts. This can make it tougher to budget and predict your mortgage payment.

Does Your Credit Card Have a Variable Rate?

These days, most credit cards have a variable rate. Check a recent copy of your credit card statement or your credit card agreement to see whether your card has a variable interest rate. You can find a copy of your credit card agreement at your credit card issuer's website or the CFPB's credit card agreement database. Give your credit card issuer a call if you have trouble finding your credit card agreement online.

Other Times a Variable Rate Might Increase

An increase in the fed funds rate isn't the only time you might see an interest rate increase. Your credit card issuer can also raise your interest rate after a promotional rate expires, if you're late on another payment with that same credit card issuer, you exceed your credit limit, or are delinquent on your credit card payment by more than 60 days.