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All about variable-rate vs. fixed-rate credit cards

By , CardRatings contributor
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Fixed-rate cards are a way to limit rising interest rates -- at least temporarily. But are those cards better than getting a variable rate credit card?

The answer comes down to your card preferences -- and even more importantly, whether you're able to get a fixed-rate credit card.

You need a good credit history and must find a card issuer that is offering fixed-rate cards, which isn't always easy. Banks have largely moved away from fixed-rate credit cards since it locks them in (at least temporarily) regardless of what happens with interest rates.

Fixed-rated cards were once seen as a great option for balance transfers. A consumer could get a fixed-rate card, transfer a balance from a high-interest credit card, and enjoy having a low, stable APR for at least a period of time. In fact, fixed-rate cards were easier to get not too long ago until Congress passed the Credit CARD Act in 2009. The law put restrictions on fixed-rate credit cards involving card issuers needing to notify customers before a rate increase and limiting a bank's ability to raise rates.

Many lenders, in turn, dropped fixed-rate cards and moved customers to variable rate cards.

So, what's the better option for you? Let's look at the differences between the cards, but first let's clear up a common misconception:

Can a fixed-rate credit card increase rates?

In a word, yes. A fixed-rate card gives you more protection from interest rate increases temporarily, but you're not entirely immune from APR increases with a fixed-rate card.

A fixed-rate card usually doesn't raise rates for at least a year after opening the card. Unlike a variable rate card, you don't have to worry about your card's APR increasing if the Federal Reserve increases rates.

Now let's get into a few more details.

What's a fixed rate credit card?

Fixed-rate credit cards generally lock in the rate for the first year. Notice that that doesn't mean a fixed-rate card never increases rates, but credit cards must notify customers of rate increases and give them 45 days before the rate hike takes effect.

This grace period allows consumers to:

  • Opt out of the card, close the account and pay off the balance at the old rate.

  • Open a different card and transfer the balance from the fixed-rate card.

  • Stay with the fixed-rate card and higher APR.

A word of warning -- opting out can affect your credit score, so you'll want to be careful and decide whether a possible ding on your credit is worth paying off the balance at a lower rate.

Don't choose a fixed-rate card just because it's a fixed rate. Instead, compare its benefits with variable rate cards.

Also, it's important to note that fixed-rate cards usually revert to variable rate credit cards after the first year, and a card issuer can increase your APR if you're late on payments.

What's a variable rate credit card?

A variable rate credit card is directly connected to the prime rate. So, if the prime rate increases, your variable rate credit card's APR will likely increase.

Your APR works this way:

  • The Federal Reserve decides on the prime rate.

  • Your credit card decides on the card's margin, which is the percentage above the prime rate that a credit card charges.

  • The difference between what the credit card charges and the prime rate is called the margin. So, if the prime rate is 4 percent and your card's APR is 15 percent, the margin is 11 percent.

Credit cards decide on the margin depending on your credit history. Those with an excellent credit score will have a lower margin than someone with a poor credit record.

Credit cards keep that margin for their customers, so if the Federal Reserve increases the prime rate by .25 percent, your card will likely increase your APR by the same percentage.

If you're concerned about high-interest rates, look for a card with a no-interest introductory period. Some cards offer more than a year without interest and free balance transfers.

>>>Check out CardRatings picks for low introductory APR cards

A variable rate card with a 0 interest introductory period and even a fee-free balance transfer option could save you more money in the long run than a fixed-rate card. Consider that there are cards out there that offer a 0 percent APR on balance transfers for as long as 21 months, which means you're protected for far longer than with a typical fixed-rate card that usually becomes a variable rate card after one year.

Another benefit to a variable rate card is that there is more flexibility, is simply the options. There are so many more variable rate cards on the market, so you can take your time and find one that truly fits your lifestyle and spending habits.

Where can I get a fixed-rate credit card?

Finding a bank offering a fixed-rate credit card isn't easy anymore. Only a few banks offer fixed-rate credit cards.

Your best best is to local locally. See if local credit unions or community banks offer a fixed-rate card for which you qualify.

Also, Pentagon Federal Credit Union offers occasional promotions to new members that allow them to lock in a low fixed-rate for the life of a balance transfer, so that's an option, too. Keep in mind that you'll need to qualify for membership in PenFed before you'll have access to its products, including credit cards.

Who should look into getting a fixed-rate credit card?

Fixed-rate credit cards with a low APR are great options for people with strong credit scores and high credit card balances. Locking in rates with a fixed-rate card takes away the worry that your credit card may jack up rates in a few months while you're still working to pay off that balance.

On the other hand, interest rates are still pretty low, so you may find a variable rate credit card with similar -- or even better -- rates. And there is the issue that not many banks even offer fixed-rate credit cards.

However, if you find a card issuer, have a great credit record, and a large credit card balance, then a fixed-rate card could be a good option for you. On the other hand…

Who should look into getting a variable rate credit card?

Variable rate credit cards are the norm, so finding a variable rate card is easy. There is much variety, so you can choose the variable rate card that works for you.

There are travel rewards cards, cash back cards, and other bonus point programs. For instance, see the full list of CardRatings Best Cards of 2017 for a look at our top picks, all of which are variable rate cards.

Going with a variable rate credit card means your card issuer is more apt to increase rates, but many variable rate credit cards offer introductory periods in which you pay no interest, so you can spend and transfer balances from other accounts without paying interest and then take advantage of that golden grail of low rates: 0 percent.

Which is better: A fixed-rate credit card or a variable rate card?

The answer to this question depends on your situation, what you want, and even whether there are even any fixed-rate credit cards available for your credit history and geographic area.

Also, remember that a fixed-rate credit card often reverts to a variable rate card after the first year.

A fixed-rate credit card is a great choice for people with an excellent credit history and a large credit card balance who don't plan to pay off the balance soon. In that case, a fixed-rate card could be right for you.

Otherwise, a variable rate credit card may be best, especially considering you have so many more choices with variable rate credit cards and a fixed-rate card eventually becomes a variable rate card anyway.

That doesn't mean a fixed-rate card never increases rates. A card issuer may increase your APR if you're late on payments.

Fixed-rate credit cards generally lock in the rate for the first year. Credit cards must notify customers of rate increases and give them 45 days before the rate hike takes effect.

This grace period allows consumers to:

  • Opt out of the card, close the account and pay off the balance at the old rate.

  • Open a different card and transfer the balance from the fixed-rate card.

  • Stay with the fixed-rate card and higher APR.

A word of warning -- opting out can affect your credit score, so you'll want to be careful and decide whether a possible ding on your credit is worth paying off the balance at a lower rate.

Don't choose a fixed-rate card just because it's a fixed rate. Instead, compare its benefits with variable rate cards.

Also, it's important to note that fixed-rate cards usually revert to variable rate credit cards after the first year.

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