Fixed rate vs. variable rate credit cards

Rising interest rates have become the focal point of many recent conversations about credit cards. For consumers who carry a balance on their credit card(s), such conversations are often filled with disgust, anger, and confusion. You may be wondering why credit card rates are rising and what, if anything, that you can do to avoid higher rates. We hope that the following tips will help you gain a better understanding of interest rates, specifically variable and fixed interest rates. CFCCT places great priority on educating consumers about such important issues. An uninformed consumer, after all, is a powerless consumer.


* Why are my credit card rates rising?!? To understand the answer this question, one must first understand how the federal government affects interest rates. On May 16th, 2000, the Federal Reserve Board of Governors raised the discount rate by 50 basis points or .50% (read press release here). Raising the discount rate, the rate that the Federal Reserve charges a bank to borrow funds when a bank is temporarily short of funds*, has become a trend as of late and most authorities feel that more rate increases are likely in the near future. As you might expect, when the Federal Reserve raises the discount rate, banks pass this rate increase on to consumers. In regard to credit cards, this is typically accomplished by banks raising their prime rate. The prime rate is the most favorable interest rate charged by banks on short term loans*. The current prime rate is 9.50%**.


* What is the difference between a variable rate and a fixed rate credit card? All credit cards offer either a fixed interest rate or a variable interest rate. A variable rate card is directly tied to the prime rate. Thus, when the prime rate is raised by .50%, the interest rate of a variable rate card subsequently rises by .50%. Credit card rates are usually higher than the prime rate. The difference between the prime rate and the actual rate of a given card is called margin. A fixed rate card, however, is not tied directly to the prime rate. Thus, when the prime rate rises or falls, the interest rate of a fixed rate card usually stays the same (see fixed rate warning below!).


* Please be aware that there is "no such thing" as a truly fixed rate card! This is a common misunderstanding among card holders. All fixed rate cards reserve the right to increase their rates periodically. Though fixed rate cards do not fluctuate as much as variable rate cards, they do fluctuate on occasion. For example, Fleet recently raised the rate on their lowest fixed rate card from 7.9% to 9.99% (read related article here). Also, be aware that fixed rate cards can change to variable rate cards. Discover, for instance, recently instituted such a change that affected some of its cardholders (read related message board post here).


* How can I avoid higher credit card rates? Without a doubt, this question is the most common question raised by consumers. This is not surprising, since rising rates can result in significantly higher finance/interest charges. Our advice... first view our Low Rate Reports, if you have not done so already. There are a few cards that still offer rates below 10%. Please note, though, that such low rates are only offered to consumers with "great credit". Finally, consider taking advantage of a introductory rate offer. Goodluck!


* Source: The Washington Post ** Source: BankRate.com


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