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Variable APR vs. Fixed Rate Credit Cards

How to Choose the Best Credit Card Offer...Find out the differences and the pros and cons of both...

So you've searched through an extensive list of credit cards and you've finally narrowed it down to two offers. The only difference between them is one has a 'variable APR', and the other has a 'fixed rate'. Most people probably think a fixed rate credit card is best, but is this an accurate assumption? Get all the facts about variable APR vs. fixed rate credit cards and decide for yourself:

Here's the Basics:

These days, fixed rate credit cards are a rare breed. Most credit card issuers only offer variable APR credit cards because they protect banks from unexpected interest rate hikes and poor economic conditions. But does a variable rate protect you as well? First, you need to understand the difference between both types of offers:

  • Variable Rate: Variable rates are normally based on one of the following indexes: the PRIME RATE, the Federal Reserve Discount Rate, or the Treasury Bill Rate. The credit card company adds a "margin" to the index to come up with the variable APR. When the index goes up, so does the credit card rate. Likewise, if the index goes down, your credit card APR does as well.
  • Fixed Rate: A fixed rate is supposed to be "fixed". This means that the interest rate shouldn't vary as long as you have your card. But here's the catch: the credit card company reserves the right to change your rate at any time. As long as you are given at least 15 days notice in writing, your "fixed" rate could be adjusted anytime.

Variable vs. Fixed Rate:

Don't expect your "fixed" rate to stay fixed forever. Although the credit card companies advertise a rate as "fixed", it can still be changed. Here are some factors to consider:

Variable Rate Credit Cards:
PROS:
  • If the PRIME RATE decreases, so does your credit card rate!
CONS:
  • If the PRIME RATE increases, your credit card rate does too.
  • The credit card's variable APR can change regularly and law does not
    require an advanced notification.
Fixed Rate Credit Cards:
PROS:
  • Interest rates should stay "fixed" even if interest rates rise.
  • By law, if the "fixed" rate is changed you must be notified in advance.
CONS:
  • A "fixed" rate can be changed at any time!
  • If interest rates decrease, you may not see an immediate benefit.

Which is Best:

Variable rate credit cards are a great option if you know interest rates are decreasing. As the PRIME RATE falls, so will your APR! But if interest rates are rising, you can try to reduce the impact with a fixed rate card instead. Although, the credit card company will probably raise rates on a "fixed" APR as well, it won't be immediate and you'll receive notification in advance.

* See our list of fixed and variable low interest credit cards >

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