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Fixed rate credit cards vs variable rates credit cards

Most credit cards in US are variable rates cards which mean you APR is not fixed and fluctuates with the market. But now you also can find some fixed rate credit cards.

When you apply for a credit card, you are generally offered extremely attractive introductory interest rates. Some credit cards even offer 0% rate of interest for a starting period of half a year or a year. However, the important question is how the interest rates are changed once the introductory period gets over. As soon as introductory period ends, you get higher variable or fixed interest rates and fees. So it is very important to know the difference between fixed rate credit cards and variable rates credit cards.

Credit cards with variable rate of interest

The prime rate of lending and the treasury bills rate keep fluctuate depending on the developments and changes in the money and financial markets. These developments affect the APR (annual percentage rate). The annualized form of the periodic rate of interest charges on the credit card is called APR. There is no maximum rate of interest that the companies can charge from credit card holder. However, there is a minimum rate of interest that is known as ‘floor rate’.

Companies issuing credit cards use the primary lending rate of interest – an index to set the variable rates of interest. Banks charge the primary lending interest rates only from their most trusted customers whose credit worthiness is very high. The financial institutions simply add a percentage to the primary rates of lending to decide the rates of interest they will charge from their other customers. Sometimes lenders also take the treasury bills as the index to set interest rates. Credit card issuers add a specified percentage to the index rate – that’s how they establish rates for good a bad score credit cards. The percentage depends on target margins and spreads.

Fixed rate credit cards

Unlike variable rates, fixed rate credit cards are protected from financial market fluctuations. They remain steady no matter what the market situation is.  Sometimes, they will be higher than the variable rates. Technically, fixed rates should not be changed. However, they may fluctuate if the company decides to change its schedule of interest as a response to extreme fluctuations in the market. Under TILA [truth in lending act], companies planning to change their fixed interest rates are required to inform all their clients at least 15 days in advance. Thus, even if you have chosen a fixed rate credit card, check the note section of your statement

Making a choice between fixed and variable rate

Making a choice between fixed and variable rates is not very difficult. It will differ according to the priorities that you have. If you prefer to have stability, you should go in for fixed rate credit card. This will give you the advantage of planning your cash flow. However, if you wish reap benefits of downward trends in financial markets; you should opt for variable rate credit card.



Tell us what do you think.

  1. Lindsay says: August 25, 2011

    Good info about fixed and variable rates on credit cards. I reached on your website by accident, so thanks.

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