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Comparing Fixed Rate and Variable Rate Credit Cards

You’ve received them once too often – new credit card offerings with very attractive introductory rates. Many are enticed because of the really low rates. Some even offer 0% interest for the next six or twelve months. Then again, you should ask what happens after the introductory period. That’s the time when your new credit card will be charged higher fixed or variable interest fees. You should also know that there is a big difference between the two types of cards.

Variable Rate Credit Cards

Most credit card companies use the prime lending rate as the index in setting their variable interest rates. The prime lending rate is what leading banks charge their most credit worthy customers, usually the prominent and most stable business clients. The interest charged by those banks are almost always the same. Lenders merely add a spread to the prime lending rate to determine the interest they will use on their other clients. Sometimes, creditors base their interest charges on Treasury Bills.

Credit card companies add a certain number of percentage points to the reference rate and the resulting sum is the interest rate to be charged on your credit card account. A credit card company may also use a multiplier on the index rate to figure out the spread or margin it will need to add back to the index.

Both the prime lending rate and the rate on Treasury Bills fluctuate along with the changes and developments in the financial market. This affects the APR (annual percentage rate), which is nothing more than the annualized version of the periodic interest charge on your credit card. While there is no limitation on how much credit card companies can charge, credit card companies usually enforce a “floor rate.” This is the lowest interest they will charge and is put in place as precaution in case the market really dips below their comfort level.

Fixed Rate Credit Cards

As opposed to the variable rates, fixed rates remain steady and the same regardless of market fluctuations. Fixed rates may be higher than variable although there could be times when they may be lower. In principle, fixed rates will not change but the company may decide to alter its interest schedule in response to severe market developments. However, lenders are required under the TILA (Truth in Lending Act) to give a 15-day prior notice before effecting any changes. Be sure to regularly check your mail to avoid getting surprised when your interest fee is increased.

Choosing Between Variable and Fixed Rate

Choosing between variable and fixed rates will depend on your priorities. If you are after stability to help you better plan your cash flow, then you should opt for a credit card with a fixed rate. However, there are experts that advise getting the variable rate so you can take advantage of any downward trend in market rates.

If you decide to go for a credit card with a variable interest rate, it will be to your advantage to check if the company has established any caps so you will know how high your interest can reach or how low it can be. If you find that the lowest rate a credit card company can give you is 16%, then you may want to look elsewhere.

Do not forget to read the fine print if you finally decide to sign up for a fixed rate credit card. This will inform you of the company policies with regard to changing of interest rates. Some card companies reserve the right to increase the interest costs for failure to pay the bill on time.

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