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If you have a balance and can get a low interest rate, you might consider getting a fixed rate card. But fixed rate credit cards can be hard to find and may have other drawbacks. Here’s a look at whether these cards might be a good option for you.
What are fixed rate credit cards?
Most credit cards today have a variable annual percentage rate, which means that the interest rate will increase or decrease depending on the reference rate, such as the prime rate. But with a fixed rate credit card, the APR is not tied to an index. The interest rate generally stays the same for the first year the account is opened, but may change under certain circumstances, including if you are more than 60 days behind on your payment or if a promotional rate has ended.
“If a fixed-rate card is available, one of the benefits is that the rate will be more predictable,” says Deborah Goldstein, executive vice president of the Center for Responsible Lending, a nonprofit research group. “That could be a good way to manage both the interest you accrue and how you’re going to repay the principal and interest of the total balance.”
You probably won’t find a fixed rate card from a major issuer. Many banks have stopped offering them because they don’t want to be locked in when rates rise. Most fixed rate cards are available from credit unions or small banks.
April Lewis-Parks, director of education and corporate communications for Consolidated Credit, a nonprofit credit counseling agency, says, “Credit card issuers want to be able to make more money and increase interest rate based on Federal Reserve and/or indexed rates. “While most credit card issuers only offer variable interest rates, credit unions and smaller banks are “always vying for new customers” and may offer fixed rate credit cards when rates are low to attract new customers.
Fixed-rate cards were easier to come by until 2009, when Congress passed the Credit Card Accountability and Disclosure Act, which placed restrictions on card issuers and prompted many to offer exclusively variable rate cards. Prior to the Credit Card Act, interest rates on fixed rate cards could be changed as long as the issuer mailed notice within 15 days of the change.
“These cards weren’t really patched at all,” says Lewis-Parks.
Can the rates of a fixed rate credit card increase?
Absoutely. Fixed rates don’t fluctuate as easily as variable rates, but they can change even if you haven’t been late with payments.
With a variable rate card, your interest rate may change the first year after a promotional rate ends or the prime rate changes. No notice is required for promotional rate or prime rate changes.
The interest rate for a fixed rate card cannot change with the prime rate in the first year, but it can change from a promotional APR of 0% to the regular fixed rate during this period. Your issuer can increase your rate after the first year with 45 days’ notice. You can opt out of the interest rate hike and cancel your accounts while paying off balances under the old lower interest rate, although this option may affect your credit score. But if you keep the credit card open, the issuer determines the rates for new purchases, says Lewis-Parks.
When can a fixed rate credit card be a good choice?
If you’re buying big-ticket items, such as furniture or appliances, or paying for home maintenance projects, such as roof repairs. In these situations, you can plan to carry a balance on your card. So, if you can benefit from an attractive fixed rate, you will know each month what your payment will be. You won’t have to worry about a surprise rate hike like you might see with a variable rate card. This makes planning easier, says Lewis-Parks.
To consolidate credit or manage debt. A card with a low fixed rate can be a great tool for balance transfers — with one caveat, according to Lewis-Parks: “People should just be aware that most card issuers charge a balance transfer fee of 3% to 5%.
However, in both of these situations, a card with an introductory APR of 0% might be a better choice. An interest-free credit card offer will be lower than a fixed rate offer, as long as you pay off your balance before the promotional APR expires.
Disadvantages of fixed rate credit cards
A fixed rate credit card that locks you into a high APR is a bad choice. If a fixed-rate card is below average — which, according to US News data, is typically around 17% to 24% — it could be considered a good fixed rate, Lewis-Parks says.
For example, the Green Dot primor Mastercard Classic secured credit card has a lower than average fixed APR of 13.99%. But the fixed APR of the Indigo Platinum Mastercard is 23.9%, which is at the high end of the average.
You should also consider other costs that might apply to a fixed rate card. The Green Dot primor Mastercard Classic secured credit card requires a security deposit of at least $200 and an annual fee of $39. The Indigo Platinum Mastercard may change an annual fee of up to $99.
Other Fixed Rate Credit Card Considerations
Are you still hesitating between a fixed rate or variable rate credit card? Here are some other things to think about:
- You are not limited to a fixed rate card if what you are ultimately looking for is a low APR. Variable rate cards may have lower than average APRs or 0% introductory APRs on purchases or balance transfers.
- Confirm your interest rate and check your balance each month. Since the rules are different for variable-rate and fixed-rate cards, “you may get different notifications from the credit card company, depending on what you have,” Goldstein says. “So if you read your statements every month, you’ll be in much better shape to know what’s coming.”
- Make it a goal to pay off your balance in full each statement period so you don’t have to worry about APR. Jory McEachern, director of operations at credit repair service ScoreShuttle, says, “An interest rate doesn’t matter if, in fact, you’re paying off your balances every month.”