Differences between fixed and variable APRs

The difference between a fixed APR and a variable APR can be either minimal or significant, depending on the specifics of the situation at hand. Much depends on your personal credit score, your credit card company, and the language in your card agreement. The basic rules are simple; the reality can be a bit more complicated.

A variable APR is an annual percentage rate that varies - increases or decreases - in accordance with the interest rates in the marketplace. For example, an APR may be defined as "Prime + 10%," which means that the APR is equal to the prime rate + 10%. So, in this example, if the prime rate increases, so does this variable APR.

A fixed APR, on the other hand, is an interest rate that does not change over a specified period of time. While fixed APRs are not fixed forever (unless stated so in the terms and conditions), they do typically stay more constant than variable APRs. A fixed rate can change but usually will not undergo as many changes as a variable rate does over a period of time.

See also: Differences between fixed APRs and variable APRs

Variable APRs

Unlike most adjustable rate mortgages (ARMs), credit cards can often change their interest rates whenever "appropriate" or desired. While your variable APR might decrease, and it does happen, the most common result is an increase.

The frequency, type, and size of potential interest rate increases will be explained in your credit card agreement. It's natural to avoid reading this legal document as it is boring and sometimes confusing.

However, it is important to read your credit card agreement from beginning to end. Note the paragraphs that are confusing. Call or email your credit card company and ask for an explanation of any language that may be confusing or leaves uncertainty.

Fixed APRs

A fixed APR is much easier to understand. Unlike variable APRs, which are fixed for a defined or, sometimes, undefined period, fixed APRs should be constant for a significant period of time. Does this mean that your interest rate will never change? No.

Unlike a fixed rate mortgage loan, the APR attached to a credit card with a fixed rate can potenitally change. A change is typically based on one or more activities that you initiate while using your credit cards.

For example, even a fixed rate credit card may allow increased rates if you charge over your borrowing limit, make late payments, take cash advances, or transfer a balance from another account. Your standard, agreed upon rate may apply to regular purchases, but may increase greatly if you charge over your card limit, make a late payment, or take a cash advance.

How fixed and variable APRs are similar

There are similarities between fixed and variable APRs. All interest rates are "fixed" for some period. Fixed rates should remain consistent for the period stated in the credit card agreement, which could be the life of the account.

Variable APRs are technically fixed for at least one payment period – usually at least thirty days. Interest rates on open accounts cannot usually vary from day to day or week to week.

The finance charge computations for both fixed and variable APRs are identical. There can be no variation in financial computations that violate Federal law. This does not mean that different interest rates cannot apply to different activities. It does mean that the finance charge computations must comply with all interest calculation regulations.

Therefore, the interest rate that applies during any given month must be computed in accordance with the terms and conditions of your credit card agreement and in compliance with Federal regulations. There is typically no difference in variable or fixed rates in finance charge computation.

Which, if any, interest type is preferable?

The common debate centers on which is preferable, variable or fixed rate APRs. As you might expect, there is no easy or certain answer. Both types can be advantageous or detrimental, depending on your credit card agreement and general economic conditions.

There is much to be said for fixed rate credit cards. However, depending on the interest rate you've been offered, a variable APR may prove better in the short- or long-term. When other interest rates are trending downward, credit card companies, because of competitive pressures, may issue a rate reduction. When this occurs, you'll believe that variable APRs are preferable.

In most instances, you'll typically vote for fixed rate APRs, as they offer some stability that doesn't usually exist in a variable rate environment. Sometimes, the comfort of knowing your rate, even if a bit higher than current variable APRs, is preferable to "rolling the dice," so to speak. Comfort is sometimes preferable to "living on the edge," even if it is a bit more expensive.

Yet, variable APRs can often work to your advantage as well. Since your rates will reflect current economic conditions, you'll never be "behind the curve." If the curve is working in your favor, you'll enjoy the benefits. Should the trend proceed in your disfavor, you'll suffer the consequences.

However, you'll always be current and not suffer any artificial interest rate disadvantages. Neither fixed nor variable APRs are good or bad. They simply are what they are. One type or the other is beneficial to you under certain conditions. Neither type will ever be always good nor always bad.

See also: Compare credit cards