Fixed Rate vs. Variable Rate Cards

Rising interest rates have become the focal point of many recent conversations about credit cards. For consumers who carry a balance on their credit card(s), such conversations are often filled with disgust, anger, and confusion. You may be wondering why credit card rates are rising and what, if anything, that you can do to avoid higher rates. We hope that the following tips will help you gain a better understanding of interest rates, specifically variable and fixed interest rates. CardRatings.com places great priority on educating consumers about such important issues. An uninformed consumer, after all, is a powerless consumer.

* Why are my credit card rates rising?!? To understand the answer this question, one must first understand how the federal government affects interest rates. For example, on May 16th, 2000 the Federal Reserve Board of Governors raised the discount rate by 50 basis points or .50%. Raising the discount rate, the rate that the Federal Reserve charges a bank to borrow funds when a bank is temporarily short of funds*, has become a trend as of late and most authorities feel that more rate increases are likely in the near future. As you might expect, when the Federal Reserve raises the discount rate, banks pass this rate increase on to consumers. In regard to credit cards, this is typically accomplished by banks raising their Prime Rate. The Prime Rate is the most favorable interest rate charged by banks on short term loans*. You can view the current Prime Rate, including a history of the Prime, on our website.

* What is the difference between a variable rate and a fixed rate credit card? All credit cards offer either a fixed interest rate or a variable interest rate. A variable rate card is directly tied to an index, typically the Prime Rate (another index used by a few issuers is the London Interbank Offered Rate or LIBOR). Thus, when the Prime Rate is raised by .50%, the interest rate of a variable rate card subsequently rises by .50% within 30 days. Credit card rates are usually higher than the prime rate. The difference between the Prime Rate and the actual rate of a given card is called margin. A fixed rate card, however, is not tied directly to the Prime Rate. Thus, when the Prime Rate rises or falls, the interest rate of a fixed rate card usually stays the same (see fixed rate warning below!).

* Please be aware that there is "no such thing" as a truly fixed rate card! This is a common misunderstanding among card holders. All fixed rate cards reserve the right to increase their rates periodically with as little as 15 days written notice. Though fixed rate cards do not fluctuate as often as variable rate cards, they do fluctuate on occasion. Also, be aware that fixed rate cards can and do change to variable rate cards.

* How can I avoid higher credit card rates? Without a doubt, this question is the most common question raised by consumers. This is not surprising, since rising rates can result in significantly higher finance/interest charges. Our advice... first view our low rate credit cards if you have not done so already. There are a few cards that still offer ongoing rates below 10%. Please note, though, that such low rates are only offered to consumers with good credit. Finally, consider taking advantage of a low introductory rate offer. Goodluck!

* Source: The Washington Post

About the Author

arnold

Curtis Arnold, a nationally recognized consumer educator and advocate, has been educating consumers about credit cards since 1998. New! Curtis is the author of "How You Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line" (FT Press, 2008). He is also the co-author of the upcoming Complete Idiot's Guide to Person-to-Person Lending (Alpha Books/Pengiun Group USA, April 2009), a contribitor to The Ultimate Allowance (InnerWealth Publishing, 2008) and is extensively featured in 42 RulesTM for Driving Success With Books (Super Star Press, January 2009).