Fixed Rates vs. Variable Rates

A credit card can either pave the way for a good spending plan or make you a spendthrift drowned in debt. Hence, before accepting a credit card, a major factor for consideration is the type of interest rate you will pay on the credit card. There are two types of interest rates – fixed interest rates and variable interest rates. If you are confused about what kind of interest rate is right for you, it is important to know your options well.

Fixed Interest Rate

If you are a card holder with this option, you always know your interest rate. The credit card company can increase this interest rate after one year, but is liable to notify you 45 days in advance. You have the privilege of canceling the card and paying the balance at a much lower rate.

Credit card issuers can increase your rate under the following circumstances:

• You have delayed a credit card payment for more than 60 days

• You had a promotional rate that has ended

• You have completed a debt management programYour underlying interest rate has changed and you now have a variable interest rate

Unless it is for one of the reasons stated above, credit card companies cannot increase your interest rate within the first year. This type of interest rate can provide stability in making monthly payments because the APR (Annual Percentage Rate) remains consistent.

Variable Interest Rate

A variable interest rate tends to fluctuate with the prime interest rate. Since it is linked to the underlying rate, it tends to go up and down. In this case, credit card issuers are not liable to send you any notifications of the changing rate. Unless you pay attention to your billing statements, you will not be able to know the change in interest rate on your credit card. However, if the credit card company increases the margin portion of the interest rate, they are liable to send you a notification in advance. The margin portion is the difference between the variable interest rate and the index rate. In this case, the rules of fixed interest rates apply. You also have an option to opt out of the interest rate.

The primary advantage of a variable interest rate is that if the interest rate goes down, your payment can become easy. If the margin portion is increased, you will always be notified. However, it is important that you pay close attention to the fluctuating interest rates.

Choose Wisely

Choosing the appropriate type of interest rate is part of a good debt management plan. Determine your financial resources. If you can afford to pay a fixed interest rate, go ahead with that option. On the other hand, if you want to play with the odds and take full advantage of fluctuating rates, choose the variable interest rate.