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Variable vs. Fixed Rate Credit CardsIf you carry a balance on your credit cards, then you should be concern as to why credit card rates are rising and fall and what can be done to avoid higher rates.
If you carry a balance on your credit cards, then you should be concern as to why credit card rates are rising and fall and what can be done to avoid higher rates. You have to understand that money has to come from somewhere. You borrow money from the bank or your credit card company to purchase an item.
Interest rates increase when the Federal Reserve Board raised the discount rate basis points, which is the rate the Federal Reserve charges financial institutions to borrow money. When this happens, banks then pass along this increase to the consumers. For credit cards, this increase is usually accomplished by raising the prime rate. A variable rate card is linked directly to the prime rate, meaning that if the prime rate increases by 0.2%, so will the interest rate of a variable rate credit card. The difference between the prime rate and the actual rate of a given card is called margin. Fixed rate credit cards are not directly tied to the prime rate; therefore, when there is an increase in the prime rate, the interest rate of a fixed rate card typically remains the same. However, do not be fooled into thinking that your fixed rate credit card is truly fixed. It is not. The rates of all fixed rate credit cards can and do periodically increase. In addition, the credit card company can change your fixed rate card to variable rate card. Which is best, a fixed rate or an adjustable rate credit card? When intrest rates are low, then consumers can save hundreds of dollars on their intrest rates each year by using adjustable-rate
interest cards. However, in rising-rate environments, then fixed-rate credit cards are the usual winners. In other words, it all depends on the economical environment at the time as to which is best.
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