Fixed rate vs. variable rate credit cards

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 nearly always a variable rate based on an index such as the prime rate (a favorable rate for consumers, set at 3 percent above the "federal funds rate" set by 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.

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 card member agreements to maximize their profit margins during such economic environments. The rate does float upward when the prime rate rises, however, which allows the banks to fully pass on their increased cost of funds to consumers.

Cards that advertised themselves as "fixed rate" cards used to be common in the credit card marketplace in the early 2000s. But calling them fixed was a misnomer, since under the laws existing at the time, the banks could and often did change their "fixed" rate credit card rates by merely providing 15 days' written notice in a nondescript mailing or as a buckslip (a small insert the size of a dollar) in your monthly billing statement. 

The Credit Card Act of 2009 changed that. Among its terms was a requirement that fixed would have to mean fixed. Banks were barred from arbitrarily raising interest rates at any time for any reason.

As a result, the market shifted en masse to variable rate cards. As of 2018, no fixed rate cards are offered by a major issuer. That means that as the Federal Reserve acts to raise rates, card interest rates will also move upward in lock step. In turn, that makes it more important for consumers to keep balances low, pay bills on time and comparison shop periodically to make sure they're getting the best possible credit card deal.

See related: Guide to rising credit card interest rates


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Updated: 08-15-2018