An important consideration when selecting a credit card is the annual percentage rate (APR). Most people are aware of this but they only focus on the number and not the terms tied to the APR. Credit cards can be divided into two groups based on the terms of APR. One is the fixed rate credit card and the other is the variable rate credit card. Let us look into the differences between the two.

Variable rate credit cards

The APR on variable rate credit cards is dependent on another index rate. Generally, this index rate is the prime lending rate. The APR will fluctuate at any time without any notice as the index rate fluctuates. However, variable rate credit cards come with a “floor rate” which is the lowest the APR can go to. This “floor rate” protects the security of the credit card companies.

Fixed rate credit cards

The main difference between the two types of credit cards is that the APR of the fixed rate credit cards is not as volatile as that of the variable rate credit cards. However, it not exactly “fixed” as the name suggests. The APR does sometimes change. Information on this policy can be found in the agreement. The company may change the APR on fixed rate credit cards with advance notice as short as 2 weeks. Do note that the APR on the fixed rate credit card is usually higher than that on a variable rate.

Which is best for you?

First consider your payment patterns.

• If you always pay off your credit card bills completely and refuse to have any balance carried forward, the APR does not affect you.
• If you tend to carry balances on your credit cards, you must give the type of rate much consideration.

Secondly, consider market situation.

• If the market is down and interest rates are decreasing, it might be a smarter move to obtain a variable rate credit card.

Thirdly, consider the “floor rate”.

• It is sometimes possible to find fixed rate credit cards with APR lower than the “floor rate” of variable rate credit cards.
• If the market is down, it will be better for you to sign up for a variable rate credit card with low APR than one with a “floor rate” of 15%.

Although the common preference is fixed rate credit cards with low APR compared to variable rate credit cards with low APR, it is entirely up to your individual expenditure and payment habits. For those who prefer stability, fixed rate credit cards may be a better choice. Regardless of your choice, do not fail to read through your agreement conscientiously on this area. Nothing beats a well-informed decision.

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