What’s the Difference Between Variable and Fixed APR?
When it comes to credit cards, one of the main differences between variable and fixed APR boils down to one word: notification.
The Annual Percentage Rate, a statement of the interest rate as a yearly rate, 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 tied to an index, often the prime rate. If you have a variable APR, the credit card agreement will state that the APR is variable and will vary with the prime rate or other index.
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 variable APR that applies to the credit agreement usually equals the amount of the prime rate plus any points a lender adds.
The advantage of a fixed APR is that it won’t change automatically, with every tick of the market, and may not move at all. But, in reality, particularly when it comes to credit cards, this doesn’t mean the APR won’t change.
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 to customers. Typically, after giving notice, issuers will give customers a grace period where they can opt to either keep the card with the new rate, close and pay off their account or transfer their balance.2
These days, most credit card agreements are based on variable APR, and even some fixed rate cards may revert to variable rates after an introductory period.
Different Types of APR
Fixed or variable, there might be more than just one APR on your credit card. 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 or balance transfers. 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, the APR on standard purchases may have less 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. Balance transfers and cash advances, on the other hand, may accrue interest from the date that transaction takes place, so you may want to try to pay those balances off faster to offset that.
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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.