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The difference between fixed & variable APR credit cards

Fixed and variable Annual Percentage Rates (APR) are two interest rate options you'll find when applying for credit cards and loans at financial institutions. An APR is a yearly interest rate used to measure the cost of borrowing credit and any changes to your rate could affect your repayment plans. A fixed APR will not be adjusted due to changes in prime rates while a variable rate can fluctuate based on current prime rates.

With a variable APR, your credit card company or loan provider will consider these economic indexes and may add in their own margin percentages (during which your credit score may be factored in) to come up with the entire interest rate. Alongside these factors, other things may be considered in factoring your interest rate such as your credit score. There may be other reasons why a fixed APR could increase, but these are commonly based on individual factors such as a change to your credit score or payment history. If your variable interest rate increases for these reasons, you should receive a letter from your bank or credit issuer at least 45 days before your new interest goes into effect.

Monitoring changes to your interest rate is important to help you make important decisions, such as which accounts to pay off quickly to avoid potentially high-interest costs and whether or not to close a credit card account.

What are the types of APR?

There are two types of APR: Fixed APR and Variable APR. The difference between these two may greatly affect the way that you pay for interest on a borrowed amount of money.

Fixed interest rate: Fixed interest is a type of rate that remains the same for the amount of time you carry a credit card balance or loan. Fixed rates will not increase due to changes to the prime index or inflation. The cost of a fixed interest rate may be higher than a variable rate since the cardholder is paying a premium for the loan's stability. Keep in mind that your fixed interest rate may still change due to other factors. Your credit card company, for example, may increase your interest rate if you have a history of missed payments and/or if your credit score recently took a hit.

If your fixed interest rate changes, your credit issuer or loan provider is required to provide you a written notice 45 days before the new interest rate takes effect. Details about any changes to your interest rate will also appear on your monthly statement.

Variable interest rate: Variable interest is a type of APR that may fluctuate based on current indexes. The frequency of this may vary depending on current economic factors and your credit issuer's policy, so be sure to read your cardmember agreement for any specific interest rate changing trigger events. If you have a credit card or loan with a variable interest rate, you will find this detailed in your monthly statement and cardmember agreement.

In some cases, variable rates could remain steady for many years, depending on economic factors such as inflation. Most credit card providers might only apply a higher interest rate to purchases that occur after the new interest rate begins. If your variable rate does fluctuate, your credit issuer or loan provider is not required to provide you with a 45-day warning. Instead, you may find out about these changes through your monthly statement, so be sure to check your monthly statement and any alerts regarding changes to your account you may find in your inbox.

What is better: variable or fixed interest rate?

Fixed and variable APR rates can both affect repayment plans for credit card balances. Although the idea of a variable APR sounds unstable at first, these rates may be lower than the fixed interest rates that are not affected by economic factors. A fixed APR may offer stability and a sense of security since your rate will not change due to economic factors, but you may end up paying more in interest over time. Regardless of which interest rate you have, your interest could increase if you have a high balance, a poor payment history or a credit score that recently decreased. Before applying for a credit card or loan, be sure to read any fine print on the card's application page to find out if the loan functions on a fixed or variable APR.