When it comes to credit cards, the main difference between variable and fixed APR boils down to one word: notification.
The Annual Percentage Rate, a calculation of the yearly interest you pay, is actually subject to change whether it’s variable or fixed. It’s just that with a fixed APR, the lender has to send out a notice first. 1
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A variable APR is often tied to the prime rate. The credit agreement states that the interest rate will vary with the prime rate.
The prime rate is tied to the federal funds rate, set by the Federal Reserve. So when you read in the news that the Fed has raised or lowered interest rates, the rates on your variable APR credit card will likely change, too.
That’s because the interest rate that applies to the credit agreement usually equals the amount of the prime rate plus points a lender adds.
The advantage of a fixed APR is that the interest rates you pay won’t go up automatically, with every tick of the market, and may not move at all. But, in reality, particularly when it comes to credit cards, this isn’t altogether true.
A lender usually reserves the right to change the interest rate when you miss a payment, or when market conditions change, but with a fixed APR, per the credit agreement, they have to give notice and customers have the opportunity to opt-out of the rate increase. 2 The good news is that the change in interest rates will often apply to whatever new balances you take on, after the notice, not to the existing balance.
These days, most credit card agreements are based on variable APR. Fixed APR is more frequently used with longer-term revolving loans, car loans, student loans and mortgages.
Different Types of APR
Fixed or variable, there is often more than just one APR. For instance, there may be a super-low APR offered as an introductory rate. There may be one APR for purchases and another for cash advances. All of this is spelled out on your pricing schedule as part of your credit agreement, and it’s important to understand these terms.
For those consumers who pay off their credit card balances at the end of each month, APRs on purchases doesn’t have a big financial impact, since it only applies to balances carried over from month to month. 3 Cards that offer perks, such as airline points, often have higher APRs and are best for people who clear their balances each month.
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If you’re looking to carry over a balance from month to month, you should consider opting for the card that offers the lowest APR, not the one that offers the best travel points.