- Credit Card companies ultimately make their money by charging interest and other related fees such as late payment etc
- If you always pay off your monthly balance when it is due then you are not a particularly good client!
- However at least 50% and maybe many more Credit Card holders use financing in some form or other
- The financing charge and indeed calculation of the financing differs from company to company with the main difference being whether they charge a Variable or Fixed rate of interest
Variable Rate of Interest
- The official Bank of England interest rates fluctuates over time
- In the early 1990s it was well over 10%, today it's under 5%
- A credit card that charges interest via a variable rate tracks the base rate and adds a further percentage on top
- If this number is say 5% and base rates are 5% then the interest rate charged by the card company will be 10%
- If you regularly hold a debit balance on a credit card and interest rates are low or falling then your monthly interest payments will get cheaper with a variable rate card
- If interest rates are high or are rising then your monthly interest bill assuming of course you carry a negative balance on your card will be expensive and will increase as interest rates rise
- But it is important to note that interest rates never wildly fluctuate from month to month, rather they are slow moving
- If rates are at present 4% but they move to 8% then this will likely take several years assuming a normal economy
Fixed Rate of Interest
- In theory a fixed rate credit card does just that, the interest rate charged is fixed at a certain level, perhaps 12.9%
- But in reality there is no such thing as a fixed rate card because in the small print the issuing company always has the option to raise this 'fixed' rate if necessary
- However this doesn't happen that often unless interest rates suddenly start to explode on the upside, perhaps going from a UK base rate of 4% to 6% over a few months
- As ever with these kinds of credit cards you want to check and read the small print to find out exactly what can happen
Which to Use - Variable or Fixed Rate?
If interest rates are falling as they have generally been for the last 10 years then a variable rate card is often the best bet. But if interest rates start to rise then a fixed rate credit card should be considered because although it's still likely that the interest rate on the card will be raised over time, it will normally be raised at a lower pace than with a variable rate credit card.
Of course this assumes that you generally run a debit balance on your card. If you always pay off the debt at the end of the month then it really doesn't matter which card you use. In this case you should be looking at what special offers the different credit cards offer or whether they charge annual fees etc.
