You can choose a credit card that either offers a Fixed Rate/APR or a Variable Rate/APR. Before we explain the differences between variable and fixed rates, it is important to understand the meaning of the term ‘Prime Rate’.
The Prime Rate is the interest rate banks charge their most creditworthy customers, which are usually large corporations. The Prime Rate is usually adjusted at the same time and in correlation to the adjustments of the Federal Funds Rate. So the bottom line is that the Prime Rate is a rate that applies to all banks and changes over time. No single bank controls the Prime Rate.
A Fixed Rate / APR locks in your Annual Percentage Rate (APR) so that it does not fluctuate with changes to the “Prime Rate”. A Fixed APR does NOT mean that the interest rate on your credit card will never change, unless they specifically say that your credit card rate will never change or will not change for X years. A Fixed APR can only increase in two cases: 1) if you receive a written notice by your credit card company or 2) if you don’t pay your bill on time and you are charged the Default APR.
On the other hand, a Variable Rate / APR changes over time in the same way as the Prime Rate. So if the Prime Rate goes up 1 percent next month, your credit card rate will also go up by 1 percent. If the Prime Rate goes down, then your credit card rate will go down as well – unless the credit card company has a minimum rate. For example, a credit card company might set your credit card rate to be the maximum of ’10 percent’ or the ‘Prime Rate + 8 percent’. In this example, even if the Prime Rate is 1 percent, your rate will not go below 10 percent.
These days, most credit cards have a Variable Rate and it is hard to find a credit card that has a Fixed Rate for an extended period of time.
Finally, sometimes you might see the LIBOR Rate mentioned instead of the Prime Rate. The LIBOR Rate plays the exact same role as the Prime Rate and it is just another very commonly used rate that applies across banks and financial institutions.
