Why Fixed Rates Are Not Fixed On Credit Cards

Credit card companies lure us with low or even 0% introductory interest rates and we sometimes lose sight of what happens when the introductory rate goes away.  When your honeymoon period of six months or a year is over, the so-called “go to” rate is then in effect.  This credit card interest rate is one of two things: Fixed or Variable.

A significant number of credit cards are variable or adjustable rate.  These rates vary in accordance with other interest rates, typically the Prime Rate plus a margin added to this index.  That is, if the Prime Rate is 6% and the margin is 5%, the rate on the credit card for that period will be 11%.   So, your variable rate credit card may be 4% or 9% higher than the Prime Rate, depending on how good a deal you qualify for.

During a period of rising rates you may have wished you’d had a fixed rate credit card instead.  The very name of the thing – fixed rate – indicates that it is stable, and that it must not and cannot and will not move.  But wait a minute, and not so fast.  Your agreement with the bank or other issuer says otherwise.  In fact the credit card company can raise your rate simply by informing you that they will do so.  It’s true.  Credit card companies can call the rate fixed as long as they inform you in writing before they fix it at another rate.  That seems wrong, and it’s likely that you won’t even take note of their notification.  It’ll be slipped into your monthly statement and you’ll discard it along with the rest of the mail debris.  Your checkbook will feel the effect, however.  If they give you thirty days notice in writing they can raise the interest rate.

Fixed rates don’t rise as quickly as variable rates do.  There is what is called a lag time as the bankers pretend to think about doing it or not doing it, and then when they decide to do it they have to write you that letter.  And of course on the other end, it’s a safe bet that bankers never once have revised a fixed rate down when the Prime Rate dropped.  They’re just not that generous, and you aren’t that lucky.  Credit card companies are in business to maximize their profits, not to reduce your monthly expense.

So, the fixed rate really isn’t fixed.  With this in mind, be attentive to the terms on the credit card application to identify those credit cards that are adjustable rate based and those that are fixed rate based.  Shop for the best credit card rate knowing that the rate may in fact change over time.  The best credit card for an individual may be determined by more than just the credit card interest rate.  When filling out a credit card application don’t ignore the other credit card services, such as rebate programs, rewards and credit card balance transfers.  Get a credit card that matches your needs and read the fine print to avoid being roped into a bad credit card.