Are Credit Cards Fixed Or Variable Rate? The Answer May Surprise You

Confused about how credit card interest rates work? Wondering are credit cards fixed or variable rate? We explain it all…

Updated April 2024
Z

Fact checked by John Wayman

Are Credit Cards Fixed Or Variable featured image

Understanding the Difference Between Fixed and Variable Rate Credit Cards

Credit cards have become an essential tool for financial stability for many people. They allow individuals to access credit to make purchases when cash flow is low. Other people don’t need cards for cash flow but use cards to get rewards including cash back.

Credit cards are usually divided into two categories: fixed-rate and variable-rate credit cards. Understanding the difference between the two is crucial before making a decision, as each has its own benefits and drawbacks. This article will break down and compare fixed and variable-rate credit cards, the key differences between them, their pros and cons, and factors to consider before choosing a credit card.

*** You should understand upfront that the vast majority of credit cards are variable rate cards. It is actually quite hard to find a fixed-rate credit card *** 

What are Fixed and Variable Rate Credit Cards?

Before diving deeper into the types of credit cards, it’s necessary to know the difference between fixed and variable rates. A fixed interest rate is a set rate that does not vary over the life of the loan or credit card debt. On the other hand, a variable interest rate fluctuates over time, depending on the benchmark interest rates and market forces.

Fixed and variable-rate credit cards are both popular options for consumers. When considering which type of credit card to choose, it’s important to evaluate your financial situation and goals.

Defining Fixed Rate Credit Cards

A fixed-rate credit card is a type of credit card in which the interest rate remains constant for the length of the credit card’s term. It means that if you have a fixed rate of 10%, it remains that way until the term of the credit card expires. Creditors decide how long the interest rate stays fixed; it could range from a few months to several years.

Fixed-rate credit cards offer stability and predictability in terms of interest rates. This makes them an attractive option for consumers who want to have a set monthly payment and avoid the risk of increasing interest rates. However, fixed-rate credit cards may have higher interest rates compared to variable-rate credit cards.

Again, though, these are really hard to find.

Defining Variable Rate Credit Cards

Variable-rate credit cards, as the name suggests, are the exact opposite of fixed-rate credit cards. The interest rate fluctuates regularly. The rates depend on the movements in a chosen benchmark rate, such as the prime rate. The prime rate, in turn, is influenced by federal fund rates, which fluctuate based on market forces. As a result, the interest rate on a variable-rate credit card changes frequently.

Variable-rate credit cards offer the potential for lower interest rates compared to fixed-rate credit cards. However, they also come with the risk of increasing interest rates, which can make it difficult to plan for monthly payments. Consumers who choose variable-rate credit cards should be prepared to adjust their budget if interest rates increase.

It’s important to note that credit card companies are required by law to notify consumers of any changes to their interest rates. This gives consumers the opportunity to evaluate their financial situation and make adjustments if necessary.

When choosing between fixed and variable-rate credit cards, it’s important to consider your financial goals and ability to make monthly payments. Both types of credit cards have their advantages and disadvantages, and it’s up to the consumer to decide which one is the best fit for their needs.

Most credit card interest rates are between 10-25%

Key Differences Between Fixed and Variable Rate Credit Cards

When it comes to choosing a credit card, one of the most important decisions you’ll have to make is whether to opt for a fixed or variable-rate card. While both options have their advantages and disadvantages, understanding the key differences between the two can help you make an informed decision.

Realistically, though, as we’ve mentioned, there’s not much of a choice. The vast majority of people will have to have a variable rate card, since fixed rate cards are so hard to find. 

Interest Rate Stability

Fixed-rate credit cards offer interest rate stability, making budgeting and planning more comfortable. With a fixed-rate card, you’ll know exactly what your interest rate will be from month to month, meaning you can plan your finances accordingly. Variable-rate credit cards, on the other hand, have constantly fluctuating interest rates, often making budgeting more challenging. This can be particularly problematic if you’re on a tight budget or have limited financial resources.

Impact on Monthly Payments

Another key difference between fixed and variable-rate credit cards is the impact they have on monthly payments. Variable rate cards tend to have a more significant impact on monthly payments, as the interest rate fluctuation leads to changing minimum payments. This can make it difficult to plan your monthly budget, as you may not know how much you’ll need to pay each month. Fixed-rate credit cards, as long as payments are made on time, have a consistent monthly payment throughout their term. This can make it easier to budget and plan your finances, as you’ll know exactly how much you need to pay each month.

Flexibility and Control

Variable-rate credit cards are more flexible, as creditors can make adjustments to interest rates regularly, depending on market forces. This can be an advantage if interest rates are falling, as you may be able to benefit from lower rates. However, it can also be a disadvantage if rates are rising, as you may end up paying more in interest charges. Fixed-rate credit cards have a set interest rate, which gives less flexibility and control. However, it also means that you won’t be caught off guard by sudden changes in interest rates, making it easier to plan your finances.

Ultimately, the choice between a fixed or variable-rate credit card will depend on your personal financial situation and preferences. By understanding the key differences between the two, you can make an informed decision that will help you manage your finances more effectively.

Pros and Cons of Fixed Rate Credit Cards

Fixed-rate credit cards are a popular choice among consumers who want to have a stable and predictable monthly payment. However, like any financial product, fixed-rate credit cards have their own set of advantages and disadvantages.

Advantages of Fixed Rate Credit Cards

  • Budget predictability and stability: One of the main advantages of fixed-rate credit cards is that they offer budget predictability and stability. With a fixed-rate credit card, you know exactly how much you will need to pay each month, which makes it easier to plan and budget your expenses.
  • No surprises in the form of increased interest charges: Fixed-rate credit cards also offer the advantage of no surprises in the form of increased interest charges. Unlike variable-rate credit cards, which can have fluctuating interest rates, fixed-rate credit cards offer a stable interest rate that remains the same over time.
  • Lower risk of late fees and missed payments due to a stable monthly payment: With a stable monthly payment, you are less likely to miss payments or incur late fees. This is because you can plan ahead and make sure that you have enough money to cover your monthly payment.

Disadvantages of Fixed Rate Credit Cards

  • Interest rates might be higher than those of variable-rate credit cards: One of the main disadvantages of fixed-rate credit cards is that their interest rates might be higher than those of variable-rate credit cards. This means that you might end up paying more in interest charges over time.
  • No flexibility to decrease your interest rates: Another disadvantage of fixed-rate credit cards is that they offer no flexibility to decrease your interest rates. If interest rates decrease, you will not benefit from the lower rates unless you apply for a new credit card.
  • Lower chance of receiving rewards or promotions associated with new credit products: Finally, fixed-rate credit cards offer a lower chance of receiving rewards or promotions associated with new credit products. This is because fixed-rate credit cards tend to have fewer incentives and rewards compared to variable-rate credit cards.

In conclusion, fixed-rate credit cards offer budget predictability and stability, but they also come with some disadvantages, such as higher interest rates and fewer rewards. It is important to carefully consider your financial goals and needs before choosing a fixed-rate credit card or any other financial product.

Latest overall average credit card interest rate is 21%

Pros and Cons of Variable Rate Credit Cards

Credit cards are a convenient way to make purchases and manage finances. Variable-rate credit cards are a popular option among consumers. These credit cards have interest rates that fluctuate based on changes in benchmark rates. Here are some of the advantages and disadvantages of variable-rate credit cards:

Advantages of Variable Rate Credit Cards

  • Opportunity to reduce interest rates: Variable-rate credit cards give you the opportunity to reduce your interest rates if benchmark rates decrease. This means you can save money on interest charges over time.
  • Potentially lower interest rates: Variable-rate credit cards may offer lower interest rates than fixed-rate credit cards. This can be especially beneficial if you plan to carry a balance on your credit card.
  • Chance of promotions or rewards: Some credit card companies offer promotions or rewards associated with new credit products. This could include cash back, points, or miles that can be redeemed for travel or other rewards.

Disadvantages of Variable Rate Credit Cards

  • Interest rates might increase unpredictably: The biggest disadvantage of variable-rate credit cards is that interest rates can increase unpredictably. This means that your monthly payments could increase, making it more difficult to pay off your balance.
  • Higher risk of missed payments and late fees: Fluctuating monthly payments can make it more challenging to budget and keep track of payments. This increases the risk of missed payments and late fees, which can negatively impact your credit score.
  • Budgeting is more challenging: With unstable interest rates, budgeting for monthly credit card payments can be more challenging. It can be difficult to plan for future payments when interest rates are unpredictable.

Overall, variable-rate credit cards can be a good option for some consumers. However, it is important to weigh the advantages and disadvantages carefully before choosing a credit card. Make sure to read the terms and conditions of the credit card carefully, and consider your own financial situation and spending habits before making a decision.

Factors to Consider When Choosing a Credit Card

Choosing a credit card can be a daunting task, especially with the numerous options available in the market. Before making a decision, it’s essential to consider several factors that can impact your financial well-being. Here are some additional factors to consider when selecting a credit card.

Your Credit Score

One of the most critical factors to consider when choosing a credit card is your credit score. Creditors often use credit scores to determine the credit limit and the interest rate for the card. Individuals with a higher credit score often receive better credit terms, such as lower interest rates or higher credit limits. It’s important to note that applying for multiple credit cards can negatively impact your credit score. Therefore, it’s advisable to research and compare different credit cards before applying for one.

Your Spending Habits

Another essential factor to consider is your spending habits. If you regularly carry a balance on your credit card, a variable-rate credit card might lead to higher interest charges. However, if you only use credit cards for emergencies or pay off the balance every month, a variable rate card may have more benefits. Additionally, some credit cards offer cashback rewards or points for specific purchases. For example, if you frequently travel, a credit card that offers travel rewards may be a better option.

Your Financial Goals

Lastly, when choosing a credit card, it’s important to consider your financial goals. Are you looking to consolidate debt, earn rewards or promotions, or build credit? Each goal requires a specific credit card that caters to the respective goal. For instance, a balance transfer credit card can help you consolidate your debt by transferring high-interest balances to a card with a lower interest rate. A secured credit card can help you build credit if you have a low credit score or no credit history.

In conclusion, choosing a credit card requires careful consideration of several factors. By taking the time to research and compare different credit cards, you can find a card that meets your financial needs and helps you achieve your financial goals.

A Fixed Rate Credit Card Is A Fine Option – If You Can Find It

In conclusion, fixed-rate credit cards offer stability and reduced risk of interest rate fluctuations. Variable-rate credit cards provide some flexibility and lower interest rates when the market is favorable. When choosing between fixed and variable-rate credit cards, individuals must weigh the pros and cons of each option and consider their financial goals, credit score, and spending habits.

Sources

  • Consumer Financial Protection Bureau
  • Creditcards.com

Editor's Note:

At Personal Finance Guru, we want to help you maximize your lifestyle through personal finance. You can trust the integrity of our independent financial advice. Our opinions are our own and have not been provided, reviewed, approved, or endorsed by any advertiser or financial product provider. To support and grow the site, however, we may receive compensation from the issuers of some products.
Cathy Gresham

Cathy Gresham

Editor & Author

Cathy Gresham is a finance whiz. 

After earning her MBA from The Wharton School, she has worked in strategy at some of the world’s largest and most influential financial companies for 20+ years. Notably, she has worked for the biggest credit card issuers and networks and brings an insider’s perspective to how credit card products work behind the scenes.  

Cathy is passionate about personal finance and investing, and loves helping people learn about these complex topics. Her wit and humor make learning about money fun, and she’s always happy to share her knowledge with others.

Cathy enjoys spending time with her family and friends when she’s not crunching numbers or developing investment strategies. She’s also an avid runner, and can often be found pounding the pavement on her morning jog.