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Low Interest Credit Cards: Four Questions to Ask When Considering a Variable Rate

by Barbara Marquand

When shopping for new credit, you might come across credit card deals offering variable interest rates that are lower than the fixed rates offered on other credit cards.

So should you go for the variable rate, hoping for the best?

First, understand the difference between fixed and variable rates. Fixed rates, by and large, stay the same. Under new credit card regulations, credit card companies can't increase the fixed rate on new purchases during the first year a credit card account is open. After that, the issuer must give you 45 days notice of a proposed fixed rate hike as well as the ability to opt out of the deal. Credit card issuers also are prohibited from raising the fixed interest rate on existing balances, unless you're more than 60 days late on your credit card payments.

Variable rates are just that--they change according to an index, and no one can predict with certainty what will happen with variable rates. Even the most qualified economists can't tell you for sure where the prime rate will be next year. Before you sign up for a variable rate credit card, ask these four questions:

1. Calculating the credit card rate: What index is used?

Variable rates are based on a specific index, such as the prime rate. Find out the index, how much it is currently and how it has performed.

2. How much is the credit card rate margin?

The margin is the amount the credit card company adds to the index to equal the variable rate you pay. If the rate is prime plus 5, and the prime rate is 3, then your variable rate is 8 percent.

3. How often can will the credit card rate change?

Read the fine print on credit card offers to learn how often the rate will change. One piece of good news: New Federal Reserve rules prohibit credit card companies from setting minimum rates, or floors, for variable rate cards, which had prevented rates from dropping below a certain threshold.

4. How important is certainty?

If you plan to carry a balance from month to month and must know how much interest payment to expect for budgeting purposes, then you might be better off with a fixed rate credit card. But a good deal on a variable rate card could work well if you can manage a little financial uncertainty.

Published 03/11/11 (Modified 03/30/11)

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