Credit Cards With a Variable vs Fixed Interest Rate
Unsure whether a variable or fixed interest rate credit card is right for you? Understanding the differences between the two options is essential to determine which one aligns better with your spending habits and financial goals. In this blog, we’ll review the key differences between the two types and highlight their advantages and disadvantages to help you make an informed decision.
What is a Fixed Interest Rate?
A credit card with a fixed interest rate will have an interest rate that remains the same from the time you open the card. As long as you make payments on time, you don’t have to worry about your rate increasing. This makes it a great option for cardholders who prefer predictability in their financial planning.
Pros of Fixed Interest Rate Credit Cards
Predictability: With a fixed rate, you can confidently plan your monthly budget since you’ll know exactly how much interest will accrue if you carry a balance.
Simplicity: When it comes to making a big purchase, a fixed-rate credit card makes it easier to plan a repayment strategy. You won’t have to guess how much interest you’ll pay over time.
Cons of Fixed Interest Rate Credit Cards
Less Flexibility: Since your interest rate stays the same, you won’t benefit from a lower rate if market rates drop.
Possible Rate Increases: If you miss payments or your credit score dips, your credit card company could increase your APR.
What is a Variable Interest Rate?
Credit cards with a variable interest rate have interest rates that fluctuate based on the market’s conditions. The rate change frequency could be monthly or quarterly, depending on the index rate.
According to a U.S. News Money article, there could be instances where your rate changes outside of market conditions. For example, a promotional rate ending, a periodic review, a missed payment, or at the issuer’s discretion.
Pros of Variable Interest Rate Credit Cards
Benefit from Decreasing Rates: If market interest rates start to decrease, so will your rate, giving you a lower payment.
Lower Initial Rates: Many variable rates start lower than fixed rates to attract new cardholders.
Cons of Variable Interest Rate Credit Cards
Unpredictability: Your interest rate may increase unexpectedly, which makes planning your budget difficult.
Risk: If rates stay high, you may pay more in the long run than if you had a fixed-interest credit card.
Which One Is Best For You?
Deciding whether a fixed or variable interest rate is best depends on your financial habits and goals. A fixed-rate may be best if you prefer stability and want to know exactly what your monthly payments will be. A fixed-rate will protect you from unexpected rate hikes. If you like the idea of possibly being able to save more money when rates are low and can handle fluctuations in your payments, then a variable interest rate could be right for you.
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