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Fixed vs Variable Interest Rate Credit Cards: What's the Difference?

Fixed vs Variable Interest Rate Credit Cards: What's the Difference?
LanternUpdated August 23, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Borrowing money is rarely free, with the costs involved, and how they are applied, usually depending on the form of credit. In the case of credit cards, some may charge an annual fee. Interest may be levied on purchases and cash advances. But the amount of interest that is charged will depend on the APR, or annual percentage rate—and there are some differences depending on whether a credit card is fixed rate or variable.Keep reading to learn some of the key differences between fixed vs. variable APR credit cards and why they matter so much.

How Interest Works on Credit Cards

The first thing to figure out when learning about how variable rate credit cards vs. fixed cards affect costs is how interest works on credit cards in general. As an individual sets out choosing the right credit card, there’s a lot to consider: annual fees, interest rates, the potential for rewards and so on.But while some credit card terms are pretty straightforward, how interest is charged is a little more complicated (and will also depend on the specifics of the credit card agreement).For starters, there’s no standard interest rate on credit cards. The APR may depend on a number of things, including the cardholder’s credit score, the type of transaction, whether the card offers rewards, whether the card is variable or fixed rate, and, if it’s variable, on the index interest rate.How interest is applied to transactions will also influence how much a cardholder pays. While the specific details will depend on the credit card and credit card agreement, most do not charge interest on purchases that are paid off in full by the statement due date or the end of any payment grace period.Depending on the agreement, some types of transactions, such as cash advances, may begin to accrue interest immediately starting on the transaction date, with interest accruing daily based on the daily periodic rate. (This daily rate is calculated by dividing the APR by 360 or 365, depending on the credit card.) The interest rate on other transactions, such as balance transfers, will depend on the credit card agreement, including the terms of any promotions.Sound complicated? The good news is everything cardholders need to know about how to calculate interest based on the specific terms of their credit card is displayed in a clear, standardized format known as a “Schumer Box,” after New York Senator Chuck Schumer, who had this disclosure legislated into federal law.If only the minimum payment is made, the credit card issuer determines how that payment will be applied to existing balances. This, too, is outlined in the cardholder agreement. While payments are generally applied to transactions with the highest interest rate first (and then in descending order, also by interest rate), it’s a good idea to refer to the credit card agreement or check with the bank.

What Is a Fixed Interest Rate?

To understand how fixed rate vs. variable rate credit cards affect interest costs, it’s also a good idea to get familiar with the definition of fixed and variable interest rates.Whether it’s the interest paid on a mortgage, a line of credit or a credit card, the idea behind fixed vs. variable rates is the same. A fixed interest rate is a set interest rate that does not fluctuate as the index interest rate changes. Just as with a mortgage or other fixed-rate credit, the APR on a fixed-rate credit card is information the cardholder can access up front, at time they’re approved for the credit card.However, just because an APR is fixed does not mean it will never change. There are some scenarios where a fixed credit card interest rate may increase:

When the Promotional Period Ends

Some credit cards offer introductory or promotional APRs with low or no interest. But when the promotional period expires, the APR will revert to the regular rate outlined in the credit card agreement.

If the Credit Card Limit is Exceeded 

Spending over one’s credit limit without first paying down the balance may trigger a higher interest rate, also known as a penalty APR or default APR.

When the Minimum Payment Is Not Made on Time

Late payments can also trigger a penalty APR. If a payment is not made within 60 days of the due date, the credit card issuer may invoke a higher interest rate. The rate reverts back to the regular APR following six on-time minimum payments in a row.

If the Bank Gives Notification of an Interest Rate Change 

The bank that issues a credit card may also choose to increase the APR on a fixed-rate card from time to time. In such instances, the credit card issuer must provide 45 days’ notice of an interest rate change. However, rate increases on new transactions are generally not allowed within the first year a credit card account is opened.

What Is a Variable Interest Rate?

Unlike fixed rate credit cards, the APR on a variable rate card may go up or down, depending on the index interest rate and on the terms of one’s credit card agreement. This means the rate of interest paid goes up as the index rate rises, and will decrease when the index rate is lowered.For variable rate credit cards, the Schumer Box will list the APR as a range instead of a fixed rate. This disclosure will also outline precisely which index rate is used to determine the APR (for example, the Prime Rate as published in the Wall Street Journal) as well as the basis on which the rate is reassessed.

Differences Between Fixed and Variable Interest Rates

The main difference between fixed and variable rate credit cards is that the interest rate may change from time to time. It’s also important to note that because it is assumed that rates on variable credit cards will increase and decrease based on the index rate, banks do not need to notify cardholders of changes within the range set out in the credit card agreement.

How to Reduce Interest Charges on Credit Cards 

One important thing that fixed and variable rate credit cards have in common is that purchases charged to both may accrue interest. That’s why it’s a good idea to know how to calculate interest on credit card transactions and keep interest charges at a minimum.

Pay Off Your Balance

Aside from such exceptions as cash advances and balance transfers, most regular purchases charged to a credit card are not subject to any interest at all if paid in full by the statement due date. Saving money on interest charges is one big reason why paying your credit cards off matters.

Get a Line of Credit

In December 2021, the national average APR on credit cards was 16.13%. However, the rates available on other types of lending products, such as unsecured or secured lines of credit or loans, can be lower. For those carrying a balance, using a lower-interest form of credit to pay off the credit card balance in full each month can help to reduce the total amount of interest one has to pay.

Transfer your balance 

Balance transfer cards are designed to help people pay down existing credit card debt, with lower interest rates levied on balances transferred over from higher interest cards (in December 2021, the average APR on such cards was more than 2% lower than the average interest on all types of credit cards).

Take Advantage of Zero-Interest Promotions

Some balance transfer cards also offer zero-interest promotions from time to time. This means no interest is charged on a temporary basis—i.e. the promotion period—on balances that are moved over from other higher-interest credit cards.

Compare Credit Cards With Lantern Today 

Paying less interest on credit card purchases starts with finding the right credit card for your needs. You may compare credit cards and all their most important details, including information about fixed and variable APRs, by visiting Lantern.
Photo credit: iStock/davidf

About the Author



Lantern is a product comparison site that makes it easy for individuals to shop for products and compare offers with top lenders. Lantern is owned and operated by SoFi Lending Corp., the digital personal finance company that has helped over one million people get their money right.
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