After the intro – variable vs. fixed rate credit cards

By Ben Woolsey

Credit card offers typically highlight their low or 0 percent APR introductory rates and other enticing features but rarely talk much about what happens when those credit card intro rates go away after six or 12 months. The "go to" rate, as it is called, is more often than not a variable rate based on an index such as the prime lending rate (the rate at which the top banks in the United States can borrow money from the Federal Reserve). The go-to rate also varies depending on your overall credit profile, since banks make their lowest rate offers to those with the best credit (i.e., lowest risk of defaulting on their credit card balances due).

Variable interest rates appear to be very consumer friendly if the prime rate is falling (as it was in the past few years) but banks normally place what is called a "floor rate" in their cardmember agreements to maximize their profit margins during such economic environments. The rate does float upwards when the prime rate rises, however, which allows the banks to fully pass on their increased cost of funds to you the consumer.

Fixed rate credit cards do exist in the marketplace and, for example, are often touted as a fixed 9.9 percent APR after the introductory period. While a fixed rate credit card might seem more appealing on the surface it is important to realize that banks can and often do change their "fixed" rate credit card rates by merely providing a 30 day written notice (as stated in extremely fine print in the cardmember agreement) in a nondescript mailing or as a buckslip inserted into your monthly billing statement.

Which type of credit card is best for you? Given the prevalence of variable rate cards in the market with great introductory rates it may be a moot point – variable is the way of the market. And, if you can stay disciplined and not revolve balances each month there is no need to be concerned with the interest rate at all. But, if you are trying to get out of debt the rate carries tremendous consequences – the fact that it is calculated as an index plus a margin or just a flat rate is probably matters less than what that equals at the end of the day.

Published: August 18, 2005