Is a Credit Card Variable or Fixed Rate?
Demystify credit card interest rates. Understand how your rate is determined and where to locate your card's essential financial details.
A credit card interest rate represents the cost of borrowing money from a credit card issuer. This cost is expressed as an Annual Percentage Rate (APR), the yearly rate of interest applied to any unpaid balance. If you pay your credit card balance in full each month, you will not incur interest charges. Credit card interest rates can be either variable, meaning they can change over time, or fixed, meaning they remain constant under certain conditions.
Understanding Variable Interest Rates
A variable interest rate on a credit card is tied to the U.S. Prime Rate. The Prime Rate is influenced by the Federal Reserve’s federal funds rate, which the Federal Reserve adjusts to manage economic factors like inflation. When the Prime Rate changes, your credit card’s variable APR will also change.
Credit card issuers determine your specific variable APR by adding a “margin” to the benchmark index. This margin is a fixed percentage set by the issuer, reflecting factors such as your creditworthiness. For example, if the Prime Rate is 7.5% and your card’s margin is 12%, your APR would be 19.5%. Most credit cards issued today feature variable interest rates. Issuers are not required to notify you of rate changes if they are due to a change in the underlying index.
Understanding Fixed Interest Rates
A fixed interest rate is designed to remain constant and does not fluctuate with a benchmark index. While the term “fixed” suggests permanence, these rates are not necessarily unchangeable. Credit card issuers can change a fixed rate under specific circumstances, though they are required to provide advance notice.
Circumstances that may lead to a change in a fixed rate include a cardholder making a late payment by 60 days or more, or if an introductory promotional rate expires. If a fixed rate changes, the issuer must provide a 45-day advance notice before the new rate takes effect, and this new rate often applies only to new transactions. Fixed-rate credit cards are less common today, especially for new accounts, compared to variable-rate offerings.
Locating Your Credit Card’s Interest Rate Information
To determine whether your credit card has a variable or fixed interest rate and to find your current APR, consult several official sources. The credit card agreement, also known as the Terms and Conditions, is a primary document that outlines all account specifics, including the interest rate type and how it is calculated. This document is provided when you open the account.
Another reliable source is your monthly billing statement. Credit card statements feature a section, often near the end, marked “Interest Charge Calculation” or a similar heading, where your current APR is clearly displayed. For variable rates, this section specifies that the APR is “based on the Prime Rate” or another index. If you cannot locate this information, contacting your credit card issuer directly via their customer service line or online portal can provide the details you need.