Q: I was looking at your list of low APR credit cards and was disappointed to see that all of them have “variable” rates. I don’t want a rate that the bank can switch at the drop of hat. What I’m looking for is a credit card with a fixed APR. Where can I find one?
A: First of all, it’s important to understand what variable rate means. Because guess what? It’s not as bad as you think.
The chart above shows you the Wall Street Journal’s prime rate, which is the rate at which banks will lend to their most creditworthy customers. It’s calculated by checking with the 10 largest banks and publishing their consensus rate.
What does this have to do with variable rates? Well, practically every variable APR credit card uses it. When the prime rate goes up, the credit card’s rate will go up by an equal amount.
Example: Let’s say you have a credit card that lists a 11.99 percent variable rate:
If you read the fine print underneath this box, you will see that the lowest tier rate (11.99%) is based on a fixed rate of 8.74% + the Prime Rate of 3.25%. Together those equal 11.99%.
But now let’s say the prime rate is increased to 3.5% (0.25% higher). When that happens, they will change your card’s APR to 12.24% (8.74% + 3.5%).
So when you see a credit card application say “variable” APR, all that means is that its APR will vary based on the Prime Rate. It does not mean they will just change your rate at the drop of a hat, unless there is a valid reason to do so (such as having multiple late payments, etc).
A variable APR probably won’t change much
As you see in the above chart, the prime rate has been stuck at 3.25 percent for a long time. It’s been there for almost 4 years (since December 16, 2008).
And guess what? It’s probably going to stay there for a while.
You see, the prime rate always runs 3 percent above the federal funds rate (currently 0.25%), which is set by the Federal Reserve). The Fed has left the federal funds rate at near zero for more than five years in an effort to stimulate the economy — and newly-sworn-in Federal Reserve Board Chair Janet Yellen announced in February 2014 that she planned to leave it there (as long as the unemployment rate stays above 6.5 percent).
Conclusion? Even without fixed APR credit cards, you don’t have to worry much about your variable APR increasing. Because of the Fed, the prime rate will probably stay the same until unemployment drops, and, even after that, it will be a very slow climb up — because of the sensitive economy, they would be foolish to raise rates rapidly.
But where do you find credit cards with a fixed APR?
Fixed APR credit card offers have basically gone the way of the dinosaur. Why? Well blame Uncle Sam for that one. When the CARD Act of 2009 was passed, it brought a lot of good changes, but also unintended consequences.
When it comes to interest rates, as you probably know the new law prohibits issuers from jacking up rates without reason.
From the bank’s perspective, that made it too risky to offer a low fixed APR – because if the prime rate went up, they would not be able to adjust the card to go along with it.
This is why practically every credit card on the market right now is no longer fixed. Instead, they’re tied to the prime rate.
Back a couple years ago there were a few tiny credit unions and regional banks that still offered fixed APR cards, but even they eventually made the switch. So where can you get them? The answer is your can’t. Right now the smartest choice is to apply for a 0 percent credit card.
Updated Feb. 13, 2014.