One crucial factor to consider for credit cards is the annual percentage rate (APR). The APR represents the yearly interest rate you’ll pay if you carry a balance on your credit card.
Credit cards can have either a fixed or variable APR, with most offering variable rates. In this article, we’ll explore the differences between fixed and variable APR credit cards, how they work, and provide tips on minimizing credit card interest regardless of the type of APR.
Fixed vs. Variable APR Credit Cards
Fixed-rate and variable-rate credit cards differ in terms of how the interest rate changes. A fixed-rate credit card maintains a consistent APR, while a variable-rate credit card’s APR fluctuates based on market rates.
To determine whether your credit card has a fixed or variable APR, check your card’s disclosure box, commonly referred to as a Schumer Box, in the terms and conditions document. This box specifies the APR and its basis. You can also find your current APR and fuel surcharge waiver charges on your monthly statement, usually under the “Interest Rates and Interest Charges.”
How Does a Fixed APR Credit Card Work?
A fixed APR credit card offers a stable interest rate that is not dependent on market rates. This means that the APR remains relatively unchanged, providing predictability for borrowers. However, it’s important to note that fixed APR credit cards are not entirely immune to interest rate changes. After the first year, credit card issuers have the right to increase the interest rate, but they must provide a 45-day notice to the cardholder.
This notice lets you decide whether to continue at the new rate or opt-out and pay off your balance at the old interest rate. Understanding that any rate increases will only apply to new purchases made after the notice is sent, not existing balances, is crucial.
How Does a Variable APR Credit Card Work?
A variable APR credit card’s interest rate fluctuates based on an index interest rate, often tied to the prime rate. When the prime rate increases, the credit card’s APR rises, increasing interest charges. Conversely, when the prime rate decreases, the APR follows suit, reducing the amount paid in interest.
Unlike fixed APR credit cards, variable APR cards can have their rates changed by the issuer at any time without advanced notice. Cardholders should carefully monitor their monthly statements for any changes in the APR. Variable APRs are calculated using an index interest rate plus a margin, resulting in an APR range based on the prime rate and the cardholder’s creditworthiness.
Comparing Fixed and Variable APR Credit Cards
The main differences between fixed and variable interest rates are as follows:
Stability: Fixed interest rates usually remain the same throughout the loan term, providing borrowers with predictability and consistency in their monthly payments. On the other hand, variable interest rates can change over time, often in response to fluctuations in the economy’s index rate, leading to potential variations in monthly payments.
Determining Factors: Fixed interest rates are typically determined by the borrower’s creditworthiness, payment history, and promotional offers. In contrast, variable interest rates are tied to an index rate, such as the prime rate, which is influenced by economic conditions and market fluctuations. Financial institutions typically set the index rate and serve as a benchmark for interest rates.
Notice of Rate Changes: Regarding fixed interest rates, the credit card issuer or lender is generally required to notify borrowers in advance if there will be any rate increase. This notification period can vary but is often around 45 days. On the other hand, with variable interest rates, credit card issuers or lenders can adjust the rate without providing prior notice as long as the change is based on changes in the index rate.
It’s important to note that these differences apply to various types of loans and credit products, not just credit cards. Understanding the distinction between fixed and variable interest rates can help borrowers make informed decisions about their borrowing options and financial planning.
When Can a Credit Card Company Raise Your Interest Rate?
Both variable and fixed APR credit card issuers have specific conditions under which they can increase the credit card interest rate. For variable APR cards, the issuer can change the rate without notice. On the other hand, fixed APR cards can only increase their rate after the first year with a 45-day advanced notice.
However, the rate cannot be increased on an existing balance unless the cardholder has a variable APR, a temporary promotional rate expires, or the minimum payment is at least 60 days late. After an increase, the issuer must reevaluate the interest rate at least every six months, often comparing it to what new cardholders with similar credit profiles would pay.
When choosing between a fixed APR and a variable APR credit card, it’s essential to consider your financial preference and fuel surcharge waiver charges. Fixed APR cards provide stability and predictability with a consistent interest rate, but they may be harder to find and can still have rate increases after the first year.
Variable APR cards offer more flexibility, as the interest rate fluctuates based on market conditions, but they can change without notice, potentially leading to higher interest charges.