If you pay attention to your credit card statements – and you absolutely must – you will notice that you will be charged interest for a number of months. Your credit card balances pay interest at any time to carry the balance after the grace period. The interest is calculated based on the rate announced to you when you sign up for your credit card. Credit cards can have fixed or variable interest. The difference between the two will affect when your interest rate may change and whether you should be notified.
What is a fixed interest rate?
A fixed interest rate remains broadly the same, but can change under certain circumstances.
- If you are more than 60 days late on your credit card payment
- You had a promotional rate that has ended
- You have just completed a debt management program
After the new credit card rules come into effect, a fixed interest rate cannot increase in the first year of account opening unless it is for one of the reasons mentioned above.
If your credit card company raises your interest, they must give you 45 days notice before the increase takes effect. You may opt out to raise interest and repay your balance on the old interest.
What else is a variable interest rate?
A variable interest rate is linked to a different interest rate, usually one that moves with the economy. The variable interest is a certain number of percentage points above the index rate. (The difference between the two rates is called a margin.) For example, the variable rate on your credit card may be prime + 13.79%. In that case, the margin, 13.79%, is added to what the prime rate is at the time to come with your interest. Prime is currently 3.25%, making your interest 17.04%.
Your variable interest rate goes up and down as the underlying pace goes up and down. Credit card issuers do not have to send you a pre-announcement when your variable interest rate goes up because the underlying rate has risen so you don’t know if your interest rate has changed unless you pay attention to your credit card account statement. If your credit card company increases the margin portion of your variable rate the fixed rate increase rules apply. Your card issuer will be required to notify you in advance of the opportunity, giving you the chance to opt out.
Is a fixed rate better than a variable rate?
The main advantage of a fixed interest rate is the requirement for advance increase and the possibility of opting out of an interest rate increase. Opt-outs can save a few dollars in interest charges, but they can hurt your credit. With a variable interest rate, you can find out when your interest rate will increase if you pay attention to news about when the FBI are rising interest rates.
You can avoid paying out the interest in full by paying your balance in full at the end of each month. That way, it won’t matter if your interest rate is fixed or variable.