Video: What are variable interest rates?


If you are among the millions of Americans who carry a balance on their credit card, understanding what variable interest rates are should be, well, interesting.

Most credit cards in the U.S. have variable interest rates, which means your APR (annual percentage rate) can go up or down, depending on market rates.

But wait a minute -- who exactly is this "market," and what are they doing messing with your rate?  

Most credit card issuers peg their rates to the prime rate, though you'll need to check your credit card agreement to know for sure. The prime rate is 3 percentage points above an interest rate set by the Federal Reserve called the federal funds rate.

Bottom line: If you hear the Fed is raising interest rates, your credit card's APR will likely go up as well.

How soon could rates rise on your card? For that, you'll have to spend more quality time with your card's terms and conditions, aka "the fine print." Some card issuers may change their APR at the start of the billing cycle after an interest rate increase -- meaning your new APR may apply to purchases you already made this month. Other issuers may wait until the next quarter to change their APR.

Want to be bulletproof against interest-rate hikes? Pay off your credit card bill each month. No balance means no interest payments. Now that's interesting. 

See related: What to do if your credit card rate goes up

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Updated: 02-21-2019