Variable Rate VS Fixed Rate Credit Cards
I know that I’ve talked a lot about mortgages, FICO, and credit scores on my channel. However, today I want to talk about the other end of the spectrum. You know, the thing that most people equate with credit: credit cards.
Did you know that there are different types of credit cards? Yep, it’s true. So, today I’m going to be talking about 2 of them—variable rate credit cards and fixed rate credit cards.
Never heard of them? That’s okay. In fact, a lot of people might have only heard of one of these types of cards anyway. I’ll talk more on that in a little bit.
Interest
The first thing that you should know is that the only thing different between variable rate credit cards and fixed rate credit cards is interest. Yes, just like any other type of loan—home or auto for example—credit cards have interest rates. Interest is the way lenders profit and make money off of issuing loans to borrowers. It is usually shown as a percentage rate.
For example, you might see a credit card advertised with a 23.99% interest rate. You may even see a credit card offered with a low 0% introductory interest rate. Lenders will use the interest rate to calculate how much interest you should pay on the principal balance owed.
How Interest Rates Affect Your Monthly Credit Card Payment
With some of the most common types of fixed loans—like home or auto loans— the interest is included in your monthly payment. With credit cards, the interest is usually just added to the card balance waiting for you to pay it off. It’s true that the creditor’s minimum monthly payments factor in interest. However, different creditors have different terms and different methods of calculation to decide exactly what your minimum monthly payment should be.
For many people, making the minimum payment each month barely covers the interest that was charged to their cards and they find themselves in a never-ending cycle of debt. Unfortunately, this is just becoming more and more common, and interest rates are partially to blame.
Higher Rates & Lower Rates
You see, the higher the interest rate on your card, the more of your money is going to pay down interest, and less of your money is going to pay off the principal balance owed on your card. Likewise, the lower the interest rate on your card, the less you pay towards interest, and the faster you pay down the principal balance altogether.
That said, there’s actually something really important that you should know before you apply for your first credit card. This will make life a little easier for you if you ever find yourself needing to carry a balance on a credit card.
There are two different kinds of interest rates: Fixed rates and variable rates.
Variable Rate
So, it’s no big surprise that lenders really, really like to make money. They also like to mitigate their risk. They like to stay in control and call the shots. Lenders use variable interest rates to accomplish this, and that is why most credit cards you see on the market today have variable interest rates.
Variable rates are exactly what they sound like. They change.
Lenders who write variable rates into their terms reserve the right to change rates on you at any given time. Your rate could go up or it could go down. And, this could happen over and over again, as often as your lender wants.
This means that if a lender sees that you’ve been responsibly using your card over time, you could be given a lower rate. A lower rate means that your bills could actually get easier to pay. It also means that, at any moment, your lender could increase your rate, and it could get a lot harder to pay your credit card bill.
Fixed Rate
But, with a Fixed Rate, that’s not the case. It’s basically the exact opposite of a variable rate.
When lenders include fixed rates in their terms, it means that the interest rate that you receive when you open your account will not change. It will stay the same—for years, decades even.
There is usually a clause in the terms that state lenders can change the terms themselves at any time. Although, lenders generally stay true to their word and keep fixed rates fixed. This is a good thing, especially if you were able to get a really low rate when you first opened your account.
For instance, when I was just 19 years old I opened up a fixed rate credit card with my local Credit union. They issued me the lowest rate available at the time—10.5%. Over 12 years later, my fixed rate has stayed exactly the same. It’s never changed once. My variable rate cards? All but one have actually increased anywhere from 3% to 10%. The last card actually decreased by about 2%.
Locking in that low fixed rate, and the predictability of it can definitely help you if you ever find yourself in a tough spot and need to finance instead of paying cash. Unfortunately, fixed rate cards can be particularly hard to find. Lenders generally don’t like to issue—or hand out— fixed rate cards because they just don’t have as much control over them. It’s really not in their best interest to offer these cards because it’s just so much riskier for them. They just don’t have the same freedom to raise rates and increase their profits any time they need—or want—to.
Where to Find
So, if the seemingly mythical fixed rate credit card really is so difficult to find, where exactly do we find them? Do they even exist anymore?
Yes, they do exist. Though, they are few and far between.
Many people recommend searching for credit cards on sites like Nerd Wallet. That is a great idea if you’re dipping your toes into the idea of credit card churning, or if you’re looking for specific rewards benefits. But if you’re searching for fixed rate cards, you may be disappointed to see that your search on these sites yields little to no results.
That’s because the lenders that offer these cards are usually much smaller institutions and organizations. So start off your search by looking small and looking locally. Look for small local credit unions in your area. In this particular case, the smaller the organizations, the better your chances might actually be at finding a fixed rate card.
Bare in mind though, smaller credit unions just don’t have the same funding as their competitors and may struggle to keep up with their competitors technology-wise. These credit unions may be a little more old-school then you’re used to. They may not have the flashiest new phone app to compete with all of the large institutions, but they sure can compete where it counts.
By giving you the lowest interest rate possible, with the best terms possible.
It’s all about priorities, right?
Recap
Bottom line? If you’re trying to pay off revolving credit card debt with a balance transfer, or if you’re looking to finance a large purchase with a credit card instead of a traditional loan, then your only concern should be about the interest rate on the card.
Be sure to keep your priorities straight. Don’t get distracted by all of the fancy and flashy travel rewards that big-time lenders offer. Or any other rewards for that matter. Steer clear of variable rate cards if you can. Do find a low fixed rate card at a small local credit union or bank. It’s not an easy search, but I promise you’ll find the one that meets your needs.
Oh Hey, It’s Ray is a real estate investor, entrepreneur, and former real estate agent. She lives happily with her husband and two children in the Pacific Northwest. See more from Ray at her YouTube channel and on Ohheyitsray.com