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Fixed vs Variable Rate Credit Cards: Which is Right for Your Wallet?

Dec 06, 2023
Understanding the differences between fixed and variable credit card rates will help with your financial goals

Since the Federal Reserve began raising rates in 2022, credit cardholders have seen their interest spike. People with variable credit card rates are dealing with the stress of unpredictability, and many lenders have pushed fixed-interest products higher. Given the volatility of credit card rates, working families are tasked with making smart borrowing decisions. Knowing the pros, cons, and differences between fixed and variable-rate credit cards goes to the heart of financial planning.

Importance of Understanding the Difference Between Fixed and Variable Rates

The importance of distinguishing between fixed and variable-rate credit cards cannot be understated. One borrowing product offers consistent and reliable interest rates. The other can increase and decrease depending on market forces. While fixed and variable credit cards may prove valuable portfolio assets, the differences can make one a better option for your unique financial position.

What are Fixed Rate Credit Cards?

As the name implies, the credit card rates of these borrowing products remain static. Regardless of whether inflation spikes or the prime index fluctuates, this class of credit card won’t ebb or flow easily. This is not to say that cardholders will never see their credit card rates change. Lenders may decide to adjust rates after providing notice, usually 45 days. It’s also possible to experience rate hikes due to late payments or a significant FICO score change. These are pros and cons to consider

Pros of Fixed-Rate Credit Cards

  • Offer borrowers predictability.
  • Attractive options when rates are low.
  • Easy to make long-term borrowing decisions.

Cons of Fixed-Rate Credit Cards

  • Credit card rates may be higher than variable options.
  • Consumers do not benefit from declining interest rates.
  • Transferring balances may require paying additional fees.

What are Variable Rate Credit Cards?

Sometimes referred to as “adjustable” or “floating” credit cards, the interest shifts based on market forces. When the prime index, an underlying benchmark, changes, variable credit card rates also move up or down. These borrowing options may also favor people with good FICO scores. These are pros and cons to consider.

Pros of Variable Rate Credit Cards

  • Credit card rates are usually lower than fixed options.
  • Cardholders benefit when interest rates drop.
  • Adjustable credit cards are more readily available.

Cons of Variable Rate Credit Cards

  • Difficult to calculate long-term borrowing.
  • More challenging to pay off when rates increase.
  • Missed payments can exacerbate interest rates.


Comparing Fixed and Variable Rate Credit Cards

When the only difference between fixed and variable credit cards stems from the interest rate, both can play an important role in your financial management plan. Fixed-rate cards are usually the preferred choice when working families wish to make a major purchase. This might involve paying for an all-inclusive vacation and budgeting installments over time. A fixed-rate allows you to accurately calculate the interest and adjust monthly spending going forward.

Because a variable-rate credit card is less predictable, it’s a better choice for short-term borrowing. Given that credit card rates are usually lower, purchasing items you can pay off in a few months makes sense.

It’s also important to consider that variable credit card rates change partly based on what commercial banks charge large corporations. For this reason, it’s also called the “prime lending rate” and is formally set by the Federal Open Market Committee in conjunction with others.

Factors to Consider When Choosing Your Credit Card

Although variable-rate credit cards are more abundant, trustworthy local lenders are willing to extend fixed-rate opportunities to valued community members. If you leverage credit to make purchases and then pay them off within a few monthly cycles, low variable rate options can save you money. Charging big-ticket items and paying them off over an extended period will require you to assume greater risk tolerance.

If your balances tend to linger or you need to make a significant purchase, the stability of fixed-rate credit cards offers predictable budgeting. It allows you to plan spending over long periods of time, knowing the monthly installments won’t change.

Making the Decision: Fixed or Variable?

In many ways, the decision involves a delicate balance between knowing your spending habits, income, and ability to tolerate financial risk. Interest rates have increased, and the markets show little signs of stabilizing. People who are averse to taking further risks may find a fixed rate card less stressful. Transitioning can be accomplished by applying for a fixed-rate option at a local lender.

It’s crucial to discuss balance transfers and fees if you wish to zero out the variable balance. While the interest rate increases may motivate you to cancel the adjustable-rate credit card, it may be prudent to simply stop using it. Canceling accounts can have a negative impact on FICO scores. And, having a card with a zero balance may come in handy in an emergency.

If you are considering opening a new credit card account or wish to switch types, speak with a local lending professional.