Variable Rate Credit Cards vs. Fixed: Does It Really Matter?

Q: How much should I weigh the variable versus fixed rate factor when choosing a credit card? What are the pros and cons for each?

A: Well first, let’s do a quick re-cap of the definition for each what the difference between them is…

  • Fixed Rate: An annual percentage rate that does not change
  • Variable Rate: An interest rate that is directly correlated to an underlying interest rate index, moving up or down along with it.

variable credit card rate disclosureWhen it comes to variable APR credit cards, virtually all of them use the Wall Street Journal Prime Rate as the underlying interest rate index.

For example, a card may advertise a “variable rate of 11.99%” and when you read the fine print, you will see that two components make up that number: (1) a fixed rate, and (2) a variable rate equal to the prime rate. The fixed component is 8.74% and the variable component is 3.25% (the current prime rate). When you add those two together they equal the 11.99%.

What happens when the prime rate changes?

The 8.74% portion will stay the same, but the 3.25% will go up or down based on changes to the prime rate. So let’s say that the prime rate went up to 7.50% (as it was in October 2007). That would mean your credit card APR would become 8.74% + 7.50% = 16.24%.

As far as the rate dropping, that is extremely unlikely given today’s record lows. To put it in perspective, the last time the prime rate was at 3.5% or lower was well over 50 years ago, during the decade which followed WWII. As a sidenote, if you’re curious and want to know what the lowest prime rate in history was, it was 1.75% on December 1, 1947.

So a fixed rate card is better?

Common sense tells us that since the prime rate is at an [almost] all-time low, locking it in with a fixed interest rate would be the ideal way to go, right? Well unfortunately that probably won’t be an option and here’s why…

Fixed rate credit cards are virtually extinct nowadays. Following the Great Recession and the CARD Act reform, banks have decided to hedge their risks by tying credit card borrowing to the prime rate. That way if the rate shoots up, they won’t be left high and dry.

In fact as of today, I do not know of any fixed rate unsecured credit cards you can openly apply for. Sure, there might be a few longtime cardholders out there grandfathered in with fixed rates, but even most of those folks were switched to variable APRs over the past few years. Basically getting a fixed rate is next to impossible now.

What should you do?

Although fixed rate vs. variable rate credit cards would clearly be the ideal solution, I really wouldn’t worry about being stuck with a variable rate in 2013 or 2014.

Why? Well given the slow state of the economy, it’s unlikely the prime rate will shoot up anytime soon. And when it finally does start to climb back up, you have so many options nowadays when it comes to 0% credit cards, you will be better off playing the balance transfer game if you absolutely must carry a balance.

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Stephanie Hainje

Purdue Federal Credit Union issues fixed rate credit cards. We remained in a fixed rate environment when most issuers moved to variable rate before the CARD Act went into affect. Our credit card program is fair and ethical for cardholders.

The University of Iowa Community Credit Union also offer non-variable credit cards. They start as low as 9.90. I would urge readers to look into credit unions. They typically have lower fees, lower rates, and a few of us are still offering non-variable cards.