Variable APR or annual percentage rate means that the interest you will pay when you carry a balance on your credit card might change after some time. A credit card’s APR is generally connected to the federal interest rate. It means that federal rate changes will also result in changes to the APR of the credit card. Let’s discuss it more in the detail What is Variable APR?
While most credit cards come with variable APR, some come with fixed APR. A notable benefit of a fixed interest rate is the fact that the issuer of the credit card must inform you before any changes to the rate are made. Although most credit card providers will also inform you about imminent changes to your credit card with a variable rate, they are not obligated to do so.
Basics of Variable APR
The interest rate on credit cards with variable APR might change for various reasons. However, a broader economic change is the most common one.
A credit card with a variable interest rate will come with details in the cardholder agreement on how to calculate the rate. Many credit card companies identify the APR by adhering to the prime rate, which is the Wall Street Journal’s published economic index.
The prime rate is ultimately affected by the federal loan rate, or the rate that the Federal Reserve, also known as the US central bank or simply the Fed, designates for banks to borrow cash from each other.
While the system is a bit complex, you can try to think of it this way: every time the federal interest rates increase, it is also likely for your credit card APR to rise as well. On the other hand, a decrease in the federal rates will make the rate of your card possibly follow suit, too.
The prime rate has remained relatively low for quite some time, so the credit card APR was also a bit lower. The Wall Street Journal has so far reported a 3.25% prime index in April 2021, substantially lower than the 8.75% it was set at in 2000.
To know your current APR, you can contact your credit card provider or check your credit card statement. While the prime rate has a large role to play in determining the interest rate of your card, It might change after some time because of several reasons.
Factors That Influence APR
Your APR may change due to bigger factors in the economy although you may also experience interest rate changes not connected to the prime rate in any way. Penalties, reviews, promotions, and special programs are among the most common reasons for changes in your APR.
After you review the statement of your credit card, you might notice a change in its APR. If a prime rate adjustment didn’t cause the change, it may be because of any of the reasons below:
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- Penalties – Your credit card company might implement a higher penalty APR indicated in the cardholder agreement if you have one or several late payments during a particular timeframe.
- Reviews – Your credit card company might review your card file and lower or raise your rate accordingly as changes occur with your credit score.
- Special promotions or programs – Some promotions and programs such as those for service members may result in lower APR. Once these end, your statement may indicate a higher APR.