In today’s cash-back, rewards-frenzy credit card market, it’s easy to overlook the one thing that really matters … the rate. After all, it’s the rate that ultimately determines how much you’re actually paying to earn those rewards. And too often, you don’t want to know exactly how much you paid in interest to get that $50 gift card…
But let’s go a step further than simple rates as an APR percentage. Let’s look at the most over-looked part of credit card rates: Fixed vs. Variable Rates.
What’s Your Rate?
There are two types of credit card rates: Fixed and Variable. FIXED rates mean the rate is fixed and will not change despite changes in the Prime Rate. VARIABLE rates mean the rate you pay is dependent upon the PRIME RATE.
Wait…what’s the Prime Rate?
Basically, the Prime Rate is the lowest interest rate that money can be borrowed commercially. While that rate might not mean anything to the average person, it has a lot to do with your credit card rate.
VARIABLE credit card rates are based upon the Prime Rate. You’ll often see your credit card rate as: 7.99% + current prime rate. As of June 2017, the current Prime Rate is 4.25%. So your credit card rate would be: 7.99% + 4.25% = 12.24% in this example.
As the Federal Reserve raises rates, the Prime Rate in turn will rise. While the Prime Rate was at near historical lows throughout the recession (sitting at 3.25% from Dec 2008 to Dec 2015), before the recession on September 18, 2007 the Prime Rate was 7.75%.
Taking our example from above, your credit card rate would be: 7.99% + 7.75% = 15.74%.
It’s Only Going Up From Here
The Prime Rate was kept at historical lows throughout the recession at 3.25%. This simply shows that the Prime Rate pretty much will not go lower. As a result, your VARIABLE rate credit card rate will never go lower than it is now – it can only go higher.
Just to illustrate how low the Prime Rate is right now, the last time the Prime Rate was 3.25% was August 4, 1955. The highest the Prime Rate was on December 19, 1980 at 21.50%.
As the Federal Reserve continues to raise rates, the Prime Rate will also increase. And in turn, your VARIABLE rate credit card will too.
What Should I Do?
The problem with most credit cards today is that they are all practically VARIABLE rate credit cards. Looking past all the rewards, cash-back and other miscellaneous perks, you have to look for the FIXED rate credit card.
Fortunately for Tampa Postal FCU members, our Platinum MasterCard has FIXED rates. In addition to earning rewards and no annual fee, our MasterCard is designed to help our members keep more of their money. No matter if and when the Prime Rate increases, you’ll never have to worry about your credit card interest rate going up.
Now that’s something to get in a frenzy about! To learn more about our Fixed Rate Platinum MasterCard, stop by any branch location, give us a call at 813.264.4969 | 800.782.4899 or visit us online.
This article is for educational purposes only. Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed.