Credit Card Interest Rates: Fixed and Variable Interest Rates

What is the difference between a fixed rate and variable rate in a credit card?

Fixed Interest Credit Card Rate:

A fixed rate is a predetermined rate of interest that is decided at the time that the consumer signs up for the card. The creditor cannot change this interest rate on the credit card expect under certain circumstances. The circumstances are as follows and are regulated according to the new credit card regulations passed on 22nd February, 2010.

· If the consumer is late by more than 60 days.

· If a promotional rate on the credit card has ended.

· The consumer has completed a debt management plan.

The creditor is also expected to inform the consumer 45 days in advance before changing the interest rate on the credit card. The consumer has the option of opting out of the new interest rate and pay off the balance according to the older rate.

Variable Interest Credit Card Rate:

A variable interest is an interest that is usually connected to the index rate of the economy. This can have interest rate fluctuates according to the changes in the economy and the index rate. A variable rate of interest is set a few percentage points above the index rate which is decided during the time of issuing the credit card. For example credit card may have a variable interest rate that is 14 per cent above the index rate. So depending on what the prevailing index rate in the economy is the credit card interest rate will be 14 points above the prime rate. The difference between the prime rate and the credit card interest rate is known as the margin. The credit card issuer does not have to inform the consumer whenever the interest rate yen changes according to the fluctuations in the index rate. However if the credit card issuer decides to increase or decrease the margin between the index rate and the credit card interest rate then he needs to inform the consumer according to the same rules that are applicable to fixed interest credit card rates. If you are trying to decide between opting for a fixed interest rate or a variable interest rate on your credit card you should understand that as long as you pay your balance in full at the end of each month it will not matter very much what kind of interest-rate you have active on your credit card. The advantage of having a fixed interest rate on your credit card is that your creditor will have to inform you well in advance about any interest increases and also give you the option of opting out of the higher interest rate. However, opting out can hurt your credit scores.

The advantage of a variable interest rate is that you can predict the change in the interest rate of your credit card provided that you keep yourself up to date with the changes in the Federal rate of interest. Also if the crime rate of interest goes down than the interest on your credit card will also decrease in which almost never happens with a fixed interest rate credit card.