Credit cards basically come with two types of interest rates, these include the fixed rate and variable rate. As the names imply, the fixed rate is mostly constant while the variable rate changes under certain conditions. Before now, you might have thought all your rates are fixed but it’s not so. This article will help you understand how it changes and why.
The Fixed Rate
A fixed rate is mostly constant as stated earlier. The word mostly is used here because it can still change under some rare conditions. But don’t worry, your credit card issuer is under obligation to notify you before carrying out such changes. So, you will be fully aware. A fixed interest rate can change under the following circumstances:
- If you are 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
After the new credit card rules go into effect, fixed interest rates can’t increase within the first year of the account’s opening unless it’s for one of the reasons listed above.
If your credit card issuer raises your interest rate, they must give you 45-days advance notice before the increase becomes effective. You’re allowed to opt-out of the interest rate increase and repay your balance at the old interest rate.
The Variable Interest Rate
A variable interest rate is tied to another interest 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 + 12.29%. In that case, the margin, 12.29%, is added to whatever the prime rate is at the time to come up with your interest rate. Prime is currently 3.25%, making your interest rate 15.54%.
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, so 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 change, giving you the chance to opt-out.
Which one is better?
The primary benefit of a fixed rate is the requirement of advance increase and the ability to opt-out of an interest rate increase. Opt-outs may save you a few dollars in interest charges, but they can hurt your credit. Your issuer can also decide to stop your credit card when you opt out. 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.