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The Difference Between Variable Rate And Fixed Rate Credit Cards
By: Morgan Hamilton
Interest rates are charged to credit card holders based on certain rates.
However, due to the changes in the economy and stock market, and sometimes due
to changes in the laws that govern credit transactions, these rates change.
People usually see cards with rates that quickly change as variable rate credit
cards, while those that “do not change” are fixed rate credit cards. But how can
you really tell these two apart?
We must first understand the nature of rising and falling borrowing rates. The
Federal Government Reserve Board increases or decreases the discount rate based
on certain pointers in the economy.
This discount rate refers to the rate that the Fed Reserve charges a bank
whenever it borrows money from the Fed Reserve when it is temporarily short of
funds. As expected, especially when the Fed Reserve increases its discount rate,
the banks pass this increase to its customers. In the case of credit cards,
banks raise the prime rate, the most favorable interest rate charged on short
term loans.
The Variable Rate plan uses indexes such as the prime rate or Federal Reserve
discount rate. Once the interest rate equivalent to the index has been
identified, the issuer will add points, or a margin, to the index to determine
the rate that will be charged to the customer. When the index, e.g. the prime
rate, changes, the interest rate of a variable rate credit card correspondingly
changes. If the prime rate increases by 1%, the interest rate also increases by
1%.
The Variable Rate plan is usually customer friendly when the prime rate falls.
However, banks keep a “floor rate”, or a minimum interest rate, to maximize
their profits whenever the prime rates fall. If the prime rate is below the
floor rate, the interest rate of the credit card will be based on the floor
rate.
If the prime rate increases above the floor rate, it will be the basis of the
card’s interest rate. When the prime rate or index increases, this allows the
bank to fully pass this increase to the customer.
On the other hand, the rates for Fixed Rate Plans are not directly affected by
the changes in the index or prime rate. If the prime rate increases or
decreases, the fixed rate usually stays the same. If the fixed rate changes, it
is only a fraction of the actual change in the index.
If fixed rates will be raised, the Truth In Lending Act provides that a 15–day
notice should be released before actually increasing the rate. Some states have
laws that require more than a 15–day notice.
Take not that there isn’t any real “fixed rate” credit card. Why? Because
whether we like it or not, banks have to modify their interest rates according
to the prevailing index rate. Even though a card has a fixed rate, it will still
change on certain occasions, unlike the variable rate card, which regularly
changes its rates. And fixed rates may also increase periodically, say annually.
If the index rate becomes very volatile, fixed rate credit cards are inevitably
changed to variable rate cards.
To determine whether a variable rate card or fixed rate credit card is suited
for you, start by reading the Rate Reports that are released by expert financial
analysts. These reports will give you a good picture, if not a thorough
understanding, of the current lending rates. Then, carefully examine the details
and terms of the bank’s credit card plans.
Take note of the maximum and minimum rates that the bank may charge you. If you
find that the minimum variable rate of the bank is higher than market interest
rate due to a falling trend, you may want to find another bank or lender.
About the Author:
Morgan Hamilton offers expert advice and great tips regarding all aspects
concerning Credit Cards. Get the information you are seeking now by visiting
http://www.getqualitycreditcards.com/types/amex
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