What does variable APR mean?

By , CardRatings Contributor

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Variable APR means that the annual percentage rate on your credit card can change over time. Don't worry, though. Banks can't just adjust your rates without notice or beyond reason. A complex set of rules governs how much you'll pay in finance charges on your outstanding balance.

Banks base your APR on a prime lending rate, usually the interbank rate published monthly in the Wall Street Journal. That's the interest rate that one large bank charges another when it borrows money overnight to even out its balance sheet. Your credit card's terms and conditions describe how many percentage points the bank adds to that prime rate to calculate how much you'll pay.

For quite some time, as of this article's writing, the U.S. prime rate has hovered at 3.25 percent. If your low interest credit card advertises a rate of 7.5 percent, they're just adding 4.25 percentage points to that published prime rate. Rewards cards typically charge higher APRs, adding ten or more percentage points to that prime rate.

Most banks use underwriting guidelines that classify your application into one of three or four "bands." A very high credit score would place you in the band with the smallest spread, usually only a few points. Dings on your credit report would force you into a band with a larger spread. And credit cards for bad credit drop you into the most expensive band.

Once you're classified into one of those bands, and you've accepted the terms and conditions of your credit card offer, that point spread can't change unless the bank meets a few conditions. First, they've got to disclose, in writing, that they're planning on changing your APR calculation. Second, they've got to give you the chance to close your account if you intend to pay down a balance under your previous terms. However, if the prime rate rises on its own, your APR will rise automatically, with no warning.

The prime rate has stayed so low, for so long, that many consumers mistakenly believe they already have fixed rate credit cards. Watch your statement carefully as the economy improves to see how high your rate might climb. While 2009's Credit CARD Act made fixed rate accounts rare in America, a handful of banks still offer credit cards for excellent credit that will lock in a low APR. If you're nervous about carrying a balance or paying down an expensive purchase, your high credit score can land you a money-saving deal.


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