Variable and Fixed Rate Credit Cards

Which is more interesting?

If you do decide to get a zero percent interest credit card, make sure you know what the interest rate will go up to after the introductory offer runs out. This new rate is typically called the go to rate and it is generally a variable interest rate.

Variable Interest Rate

Variable interest rates are based on an index such as the prime lending rate, which is the rate at which the top banks in the U.S. can borrow money from the Federal Reserve. For instance, the card may offer you an interest rate of prime plus two percent. The go to interest rate will also vary depending on your credit history and profile. Borrowers with the best credit ratings will receive the lowest interest rate offers.

If the prime lending rate is low or falling, then a variable interest rate credit card may be a good idea. However, banks usually put into effect a practice called a floor rate, which is written into the credit card contract. This means that there will be an absolute minimum percentage rate you can receive, no matter how low the prime rate drops. This way, the card issuers and banks will always make their profit. There is no interest rate ceiling on these cards though, so if the prime rate rises, your interest will climb with it. If the banks have to pay more to borrow money, it is really the consumer who ends up covering the costs.

Fixed Interest Rate

Fixed interest rate credit cards are popular with some people, as they always know exactly what their interest rate will be from month to month. However, you should be aware that banks and credit card companies are allowed to raise their fixed rate credit card rates as long as they send you a 30 day written notice. If you look hard enough through the fine print on your cardholder’s agreement, you will find this in there.

If you’re trying to decide which type of credit card is the best for you, variable or fixed rate, it doesn’t really matter if you pay off the full balance every month. However, if you’re only making partial payments, you will need to do some research on the different offers and the trends of the prime rate. The type of credit card you choose will ultimately depend on your financial needs.