What is the difference between fixed APR and variable APR?

  • 4 min read

Credit cards come with one of two types of APR percentage: fixed and variable. A fixed APR contains an interest rate that does not change as long as the borrower pays his bills on time. If the borrower fails to pay, then the APR can change. A variable APR contains an interest rate that is subject to change whether or not the borrower makes his payments. The change in the interest rate is determined by national and global economic factors.

Fixed APR

A fixed APR is great for those who don’t want to take the chance of having the interest rate get too high. However, you must be aware that credit card providers reserve the right to change the fixed APR at any time. They will simply notify the cardholder within 15 days to let them know the rate is going to change.

Cardholders reserve the right to cancel their credit cards if they dislike the terms, but they will still be responsible for the balance that is left on the card. This balance will be subjected to the new APR until it is completely paid off.

Variable APR

A variable APR can change at any time. Credit card providers are not obligated to send notices about changes as they are with Fixed APRs. However, cardholders will still get to see what their APR is when they view their statement every month. If they have an online account then it can be viewed there as well.

The new rates are primarily based on one of the three financial indexes:

  • Prime Rate
  • Treasury Bill Rate
  • Federal Reserve Discount Rate.

A margin is then added to the index to determine what the new variable APR is going to be. Once the index goes up, the variable APR rate goes up. If the index goes down, then the variable APR goes down.

The Choice

If you know how to study the financial indexes on your own then you may feel confident with variable APR credit cards. Otherwise a fixed APR credit card is more suitable for you. Rates changes will be provided to you by the credit card provider in writing.

Credit card companies are in the business of making money. They make money by charging borrowers ‘interest’ on the amount they charge to their card. Similarly, banks make money because much of their revenue comes from interest payments on issued loans. Credit cards are basically just like loans, except that people can make purchases through a card instead of writing a check.

Interest Payments

The interest charges get added to your month statement.The more you charge your credit card, the higher your interest charges are going to be. When your monthly credit card bill arrives, you will pay this interest if you make the minimum monthly payment.

The only way you can avoid paying interest is to pay the full balance owed on your credit card each month. Many people do this and enjoy the rewards offered to the consumer such as cash back, reward miles or points that can be redeemed on goods and services.

Difference between Interest and APR

  1. People tend to get confused by the terms “APR” and “Interest Rates” because they are usually used interchangeably. The truth is that they have two different meanings. The interest rate is the fee that you get charged for using the credit on your card. It is similar to taking out a loan and paying interest on the loan amount you are given.
  2. But with APR, this represents the total cost that borrowers will have to pay for using a credit card. This not only includes the interest charges, but also the one-time setup fees for the account, transaction costs and any other hidden fees that are included in the fine print. All of these costs get averaged together into one rated percentage. That way if the borrower doesn’t happen to read the fine print, they will still see the APR and understand the total percentage they will have to pay back on their credit card. That is why APR is always higher than the interest rate.

Christopher - BSc, MBA

With over two decades of combined Big 5 Banking and Agency experience, Christopher launched Underbanked® to cut through the noise and complexity of financial information. Christopher has an MBA degree from McMaster University and BSc. from Western University in Canada.