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fixed vs variable apr
8 Jun 2019

Fixed vs Variable APR: Which Rate Is Better for a Credit Card

Americans are purchasing products online, sending money with apps, and using their phones to pay for goods and services. Cash payment methods are becoming extinct. In fact, only three out of 10 transactions are made with cash.

What’s the dominant method of paying for goods and services? With a credit card, of course. Credit cards help you pay for goods now and pay them off later.

But there’s one major disadvantage to using a credit card — interest rates. Many credit cards offer either a variable or fixed interest rate. Is one better than the other? Here’s your fixed vs variable APR guide.

Variable Interest Rate

A variable interest rate differs with the market. This depends on your credit score and the interest rate index.

The interest rate index is the overall benchmark for interest rates and changes, depending on the national and worldwide financial markets.

How credit card companies calculate the variable interest rate is by first looking at the ideal interest rate based on your creditworthiness and the index.

For example, let’s say the index is 3.25%. Let’s say the ideal interest rate for your card is 13.79%. These numbers will be combined to discover your interest rate. Your current interest rate will be 17.04%.

The major factor of variable interest rates is the index causes your interest rate to go up or down. You usually won’t discover this change until you receive your credit card statement.

Fixed Interest Rate

Unlike a variable interest rate, a fixed interest rate never changes.

The credit card company chooses this rate based on an overall scale for the card and by your creditworthiness. In short, higher credit scores have lower interest rates.

However, that doesn’t mean your interest rate will never change. Here are some factors that can increase your interest rate.

  • A lower, promotional rate ended (common after the card is over a year old)
  • If you’re more than 60 days late on your last credit card payment
  • You had to endure a debt management program

There are some benefits with a fixed interest rate over a variable interest rate. For example, if your interest rate increases, the bank needs to notify you. They don’t notify you if you have a credit card with a variable interest rate.

Also, you can opt out of the interest rate increase under certain circumstances. For example, let’s say you’re a couple of months late on your credit card bill. Your bank sends you an interest rate increase warning.

You can opt out of the increase by making a payment on your credit card bill.

Fixed vs Variable APR: Which Is Better?

By now, you’re probably wondering which interest rate is better. This answer depends on you, your preference, and your financial situation. That’s because both interest rate types come with those own advantages and disadvantages.

As mentioned, the main benefit of a fixed APR is your interest rate pretty much stays stable. If it has to increase, your bank will notify you. You can deny this increase by completing the required action.

However, variable interest rates have a huge advantage over fixed interest rates. They’re a little better for your credit. Though the same is not always true for installment loans.

Let’s say you have a fixed interest credit card there is an interest rate increase. This can impact your credit since the interest rate increase is likely a penalty (this isn’t the case if the increase was due to an expired promotion).

However, variable interest rates increase because of the market, not your credit.

You may think variable interest rates are the lesser option because of the possible interest rate increase. Fortunately, interest rates rarely spike up too high.

This means if you do have to pay more, it shouldn’t be more than a few dollars difference.

How do you know if the interest rates increase with a variable interest card? As mentioned previously, the bank isn’t required to send you a notice. You can keep up with these increases by paying attention to the news.

How to Avoid Higher Credit Card Interest Rates

We explained the difference between variable and fixed interest rates. Is your priority still achieving the lowest interest rate possible? Here’s how to save money on your credit card bill.

Increase Your Credit Score

Regardless if you have a variable or fixed interest credit card, you’ll receive the lowest interest rate if you have a high credit score. Your credit score determines your trust with credit.

A high credit score tells credit card companies you’re responsible with credit, placing you at a limited liability for them.

They will reward you with a great credit card that comes with low interest.

Opt for a Fixed Interest Card

If your goal is to avoid higher credit card rates, it’s best to stick with a fixed interest card. This way, you know what interest rate you’re paying each billing cycle.

Your fixed interest rate may not always be fixed, but there are easy ways to avoid that increase. And the easiest way to avoid an interest rate increase is…

Pay Off Your Credit Card in Full, Every Month

We can’t stress this enough. Pay off your credit card in full. Make your payments on time. Never spend more than what you can afford. If you struggle with this, try budgeting.

A good piece of advice is to never spend more on your credit card than what is in your bank account. For example, let’s say you have $800 in your bank account. Never let the amount on your credit card exceed $800.

What if you can’t pay your credit card in full? Make more than the minimum payment and pay it off on time.

Are You Looking for a Credit Card?

Now that you’re done reading this fixed vs variable APR guide, are you confident which type of interest rate works best for you? It’s time to select a credit card!

And if you don’t have the best credit score, here are great credit cards for bad credit.

Here are some other articles you might find interesting:
9 Things You Should Know Before Taking Out Credit Card Insurance
The Top 5 Credit Card Terms Every Credit Card Owner Should Know
Rebuild your credit score with credit cards for poor credit
What You Need to Know About Debt Consolidation Loans for Bad Credit