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Credit Cards: Fixed or Variable?

by Barbara Marquand

One of the important factors to consider when shopping for a credit card is the interest rate. You want to shop for the lowest rate possible over time, so it's wise to weigh pros and cons of a fixed or variable rate. Even if you plan to pay your bill each month and avoid finance charges, it's a good idea to review interest rates. Life is unpredictable and you might end up carrying a balance at some point.

A key consideration is whether to choose a fixed or variable rate. Fixed rates can change only under certain circumstances. A growing number of credit cards marketed today have variable rates, which are tied to a particular index, usually the prime rate, and can go up and down.

So which should you choose? Consider the following:

• Low Interest Credit Cards: Fixed Rate Advantages

A fixed rate gives you relative certainty. Under the new credit card regulations, which are part of the Credit Card Act of 2009, credit card companies can't boost a fixed interest rate on current balances unless you're 60 days late on your bill, and they can't hike the rate on new purchases during the first year of the contract. After that, they must give you 45 days notice of any rate increase on new purchases and a chance to opt out of the card.

• Variable Rate Credit Card Advantages

You may get a better deal with a variable rate than a fixed rate when the prime rate is low. Under new rules set by the Federal Reserve, credit card companies can no longer set minimum rates, or floors, for variable rate cards--a big win for consumers. Before the new rules, banks had set floors on variable rates to protect themselves against drops in the prime.

• Understand How Credit Card Rates are Set

The fixed rate is simple--it stays the same, unless after the first year you opt in to any proposals by the credit card company to increase the rate on new purchases.

If you go for a variable rate card, make sure you understand how the rate is calculated and how often the rate can change. Look for that information in the credit card application and credit card agreement. The rate you pay equals the index plus a margin set by the credit card company. If the variable rate is prime plus 6, for instance, and the prime rate is 3 percent, then your interest rate is 9 percent.

With a variable rate card, remember that rates can go up, and that can make a big difference in how much you pay if you carry a large balance.

Published 03/07/11 (Modified 03/08/11)

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