There are two types of credit card interest rates, and it is advisable to know the difference between both; fixed interest rates and variable interest rates. Before borrowing any amount of loan, being aware can help you save money and meet your financial goals on time. In this blog, we will discuss the difference between the two and which is better to opt for.
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What is an APR on Credit Cards?
When you use a credit card, sometimes there are extra fees you have to pay besides just the interest rate. APR is a way of calculating how much you’ll have to pay overall for using the card, including those fees and the interest rate.
Fixed Credit Card APR
Fixed interest rates mean the amount of interest you pay stays the same, even if the market changes. It can be good because you know exactly how much you must pay back monthly. After the first year of having a fixed-rate card, your interest rate can change with 45 days of notice from your credit card company. It might happen if you miss any repayment or if a special deal you got expires. If you get a message that your interest rate is going up, you can choose to keep using the card at the new rate or stop using it and pay off what you owe at the old rate. Your credit card company can change the fixed rate, so it becomes imperative to read any notice sent to you and keep the payments on time.
Variable Credit Card APR
A variable APR credit card differs from a fixed APR credit card because the interest rate might change depending on the prime rate, which is the bank’s interest rate. If the prime rate goes up, the credit card’s interest rate will also follow, and you’ll have to pay extra interest. Supposedly the prime rate goes down, your interest rate will also go down, and you’ll have to pay less as interest. You must be very careful as the credit card company can change the interest rate without warning on the variable APR credit cards.
So you must be attentive to your monthly statement to notice any ups or downs in the interest rates. The credit card company adds a margin to the prime rate to calculate your variable APR. For example, assume the prime rate is 7%, and you have good credit. The credit card company may add a 10% to 12% margin. As a result, the APR on your card would be between 17% and 19%.
What To Choose Between The Two?
Most people use a variable APR credit card because it is easier to find and often comes with better rewards, welcome offers, benefits, and other essential features. These cards also offer a 0% introductory rate, which is helpful if you need to make a big purchase and want to avoid paying interest.
However, with a fixed APR card, you get advanced notice when your interest rate changes. It allows you to opt-out and pay off your balance at the old rate if you don’t want to accept the new rate.
A variable APR might increase in today’s economy, where interest rates are rising. It means you’ll end up paying more in interest charges on any balance you have on your card.
If you want to keep a balance on your credit card for a long time, finding a card with a lower fixed APR rate may be a good idea. It can help you save money on interest charges. However, fixed APR credit cards are rare, and it can be hard to find one. Most big credit card companies do not offer fixed-rate cards.
If you’re deciding between a fixed or variable APR credit card, it’s essential to focus on the card’s current interest rate. It is because your rate can change with either type of card.
Also Read: What Is a Credit Card Billing Cycle?
Conclusion
It becomes extremely critical to know and comprehend the difference between fixed and variable credit card interest rates. On the one hand, fixed rates are economical and provide stability, and on the other hand, variable rates provide rewards, virtual credit cards free, and introductory rates.
Many factor influence which type of card to choose so that you do not have to pay unnecessary fees and interest charges; these factors may include your financial situation, financial goals, spending habits, etc.
