Good terms: Fixed vs. variable interest.
We previously defined credit card interest and outlined some of the different types that a lender can charge, including interest on purchases, balance transfers and cash advances.
In this article, we’re walking you through the difference between fixed and variable interest rates on credit cards. Hint: one doesn’t change (that often) and one does.
Read on to get a better understanding of the different ways interest can be applied to your credit card balance.
Fixed interest rate:
This is a common type of interest rate that generally stays the same over time, even if market conditions change. There are exceptions, however – as some cards come with an introductory low interest rate, and that rate will change when the promotional period ends. Other exceptions can include changes in interest rates if you’ve missed a series of payments, or if there’s a change in your account terms.
Tip: Before you apply for a credit card, always read the fine print. If you accept a low introductory rate offer, know when the promotional period ends, and be aware of the standard interest rate that will come into effect. You don’t want any surprises on your statement down the road.
Variable interest rate:
Some credit cards come with an interest rate that changes based on a public index rate. We get it, it’s confusing, so we’re going to let our lawyer explain the rest ...
“A variable interest rate is one that changes based on market conditions and is usually expressed as a variable index rate plus a fixed amount. Many banks use the Canadian Prime rate, which is set by the Bank of Canada based on its outlook for the economy. So for example, if your variable annual interest rate is equal to the Canadian Prime rate plus 3%, and the current Prime rate is 2%, your interest rate will be 5%. If the Canadian Prime rate later increases to 4%, your annual interest rate would increase to 7%.”
See? That was easy – now you can skip out on applying to law school and catch up on your reading instead.
Tip: Although a variable interest rate can fluctuate to your benefit, it’s always best to try to pay your balance in full before the payment due date to avoid paying any interest at all.
Now that we’ve gotten that out of the way, the final article in this series will discuss a couple of other important terms related to credit card interest — the grace period and revolving balance. Get ready, it’s a real page-turner, erm, scroller.