Interest is a term used in financial jargon to describe the amount of money added to your debt. Interest is usually calculated as a percentage of the principal amount you borrowed. Borrowers pay them on credit cards and other loans, but lenders can charge them for deposits held in savings accounts or mutual fund investments. If you want an answer to is a credit card fixed or variable, you must read further.
What is a variable interest rate?
A variable interest rate changes over time. It’s based on the Prime Rate, at which banks offer their best customers loans. The Prime Rate can change at any time, so tracking how much you’ll spend on your credit card is essential.
If you have a variable interest rate, your minimum payment will be calculated using two different interest rates:
- Your fixed APR (annual percentage rate) plus any applicable fees
- The current Prime Rate
“A credit card’s annual percentage rate, or APR, represents the cost a consumer pays to borrow money from credit card issuers, represented as a yearly cost,” explains SoFi professionals.
What is a fixed interest rate?
A fixed interest rate is a rate that remains the same for the life of a loan. Interest rates are fixed at the time you take out a loan.
Fixed rates are usually higher than variable rates, but they don’t change if general levels of interest rates change, which can make them better suited to some borrowers.
How are variable and fixed interest rates calculated?
Interest is charged on credit cards based on the outstanding balance. However, it’s possible to have different types of interest charges depending on your card and its features.
For example, some cards can charge fixed and variable rates. The former applies to loans with set payback times, such as balance transfers and student loans; you’ll know exactly how much interest you’ll pay each month before signing up for the loan. Even if your balance changes during that time. The latter applies to other loans like credit cards; these rates change based on how much debt you’ve racked up over time. To calculate how much interest will be charged in this case, multiply what your monthly payment will be by both variables:
- Interest = (monthly payment) x (fixed annual percentage rate) + ((monthly payment) x (variable annual percentage rate))
How to determine whether you have a variable or fixed interest rate?
Check your credit card statement if you’re unsure whether your card has a fixed or variable interest rate. You should see the specific type of interest rate listed there. If it’s unclear, call the credit card company and ask about their rates. Then, they’ll tell you what rate applies to your account.
Another way to check is by checking with friends or family who have the same card as yours; they may have already figured out whether their cards are fixed or variable.
If you are in the market for a new credit card, there are many different factors to consider. Whether or not your credit card charges interest can play a big part in your decision. If you’re looking for more information on variable vs. fixed interest rates and how they work, check out our blog post!