Interest rate is one of the first-to-take-into-consideration credit card features when it comes to choosing a credit card. The two basic types of interest rate you can have on your plastic are fixed rate and variable rate.
A variable rate means that your interest can vary due to the Federal Reserve’s moves, changes on the credit card market or whenever your lender finds it appropriate. Here is how variable rate is calculated. The Fed sets the prime rate, which becomes a basic component of your interest that cannot be changed by a creditor. Then a credit card issuer adds a certain percentage to it, having checked or credit score and credit history. As a result you get, say, the prime rate plus 5%. Currently, the US prime rate is 5%. So, your rate will be 10%. And it can change with fluctuations of the prime rate.
As for fixed rate, it is initially set by a credit card company, irrespective of the prime rate. And you can come across numerous credit card offers that promise fixed rate for life of the account. However, it does not mean that your APR will remain unchanged. The lender reserves the right to change it in their reasonable discretion.
What can cause a sudden jump of your fixed interest?
Say, you have a credit card – no matter if it is a low APR one or a reward credit card – with a fixed rate of about 8%. You make even more than the payment due, and you are never late with your payments. Then, bang! The next time you get your credit card statement, you find out than your interest has dramatically soared to 21% or even higher.
This is how creditors can explain it to you. This might be a result of universal default clause. Credit companies occasionally check your other credit card accounts. If lenders find at least one credit card with delinquent payments, high balances, even if it is from another issuer, they can apply a universal default clause to you. Which means that your interest will be significantly raised, no matter if it is variable or fixed. Federal law does not prohibit credit card companies to change any of a customer’s credit card terms. All they have to do is just send you a 15 days’ notice.
Late payments, credit card balances increase, opening a number of new credit card accounts, going over your credit card limit – all this can trigger universal default.
The best way out of a situation like that is suspending the account with universal default. You will have to stop using the card until the balance is paid off, but you will keep your initial interest rate.
As you see, even a low interest credit card with fixed rate can turn into a bad headache for you, in case a credit provider includes the universal default clause in credit card agreement.
Next time you browse through credit card offers looking for a good one for you, do not rush to grab a card that comes with a fixed rate. You’d better find one that does not include a universal default clause. This, at times, can save you more money than a fixed rate that, in fact, can change any minute.
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