Fixed Rate vs. Variable Rate Cards
June '2000 Card Tips from the Staff
of
CardRatings.com
Rising interest rates have become the focal point of many recent
conversations about credit cards. For consumers who carry a balance on
their credit card(s), such conversations are often filled with disgust,
anger, and confusion. You may be wondering why credit card rates are
rising and what, if anything, that you can do to avoid higher rates. We
hope that the following tips will help you gain a better understanding of
interest rates, specifically variable and fixed interest rates. CFCCT
places great priority on educating consumers about such important issues.
An uninformed consumer, after all, is a powerless consumer.
* Why are my credit card rates rising?!? To understand the answer this
question, one must first understand how the federal government affects
interest rates. On May 16th, 2000, the Federal Reserve Board of Governors
raised the discount rate by 50 basis points or .50% (read
press release here). Raising the discount rate, the rate that the
Federal Reserve charges a bank to borrow funds when a bank is temporarily
short of funds*, has become a trend as of late and most authorities feel
that more rate increases are likely in the near future. As you might
expect, when the Federal Reserve raises the discount rate, banks pass this
rate increase on to consumers. In regard to credit cards, this is
typically accomplished by banks raising their prime rate. The prime rate
is the most favorable interest rate charged by banks on short term loans*.
The current prime rate is 9.50%**.
* What is the difference between a variable rate and a fixed rate
credit card? All credit cards offer either a fixed interest rate or a
variable interest rate. A variable rate card is directly tied to the prime
rate. Thus, when the prime rate is raised by .50%, the interest rate of a
variable rate card subsequently rises by .50%. Credit card rates are
usually higher than the prime rate. The difference between the prime rate
and the actual rate of a given card is called margin. A fixed rate card,
however, is not tied directly to the prime rate. Thus, when the prime rate
rises or falls, the interest rate of a fixed rate card usually stays the
same (see fixed rate warning below!).
* Please be aware that there is "no such thing" as a truly fixed rate
card! This is a common misunderstanding among card holders. All fixed rate
cards reserve the right to increase their rates periodically. Though fixed
rate cards do not fluctuate as much as variable rate cards, they do
fluctuate on occasion. For example,
Fleet recently raised the
rate on their lowest fixed rate card from 7.9% to 9.99% (read related
article
here). Also, be aware that fixed rate cards can change to variable
rate cards.
Discover,
for instance, recently instituted such a change that affected some of its
cardholders.
* How can I avoid higher credit card rates? Without a doubt, this
question is the most common question raised by consumers. This is not
surprising, since rising rates can result in significantly higher
finance/interest charges. Our advice... first view our
Low
Rate Reports, if you have not done so already. There are a few cards
that still offer rates below 10%. Please note, though, that such low rates
are only offered to consumers with "great credit". Finally, consider
taking advantage of a introductory rate offer. Goodluck!
* Source:
The Washington Post ** Source:
BankRate.com
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