Variable vs. fixed interest rates: What’s the difference?

Credit products like credit cards and loans have interest rates that are either variable or fixed. While variable rates can change over time based on market conditions, fixed rates generally don’t change. 

Knowing how interest rates work can help you better understand the cost of borrowing money and how you’ll manage payments. Read on to learn more about the differences between fixed and variable interest rates.

What you’ll learn:

• A fixed interest rate typically doesn’t change throughout the loan term.

• A variable interest rate can fluctuate based on market rates or changes to index rates, like the prime rate.

• Mortgages and auto loans are two common examples of fixed-rate loans.

• Credit cards and home equity lines of credit (HELOCs) are two examples of credit with variable interest rates.

A variable interest rate can change over time. Also called an adjustable rate, it typically fluctuates based on an index—like the prime rate—that lenders use to set their own rates. As index rates change, the interest rate on a variable-rate loan may change accordingly. That means the rate may increase or decrease. And some variable-rate loans may also have a cap, which limits how much the interest rate can change—even if the index rises higher than the cap.

Variable interest rates are common with credit cards, private student loans, HELOCs and personal loans.

When it comes to credit card interest rates, they’re usually expressed as a yearly rate—known as an APR.

Here’s a short video explaining APR and how it’s calculated:

Variable interest rates may change periodically based on index rates. Consider a variable-rate credit card that’s tied to the prime rate. If the prime rate rises or falls, your rate may increase or decrease with it.

Some credit cards or loans may have guidelines about how often your rate can change and by how much. For example, your loan terms may only allow a rate change once or twice a year.

As its name implies, a fixed interest rate generally doesn’t change over time. Fixed rates are based on market conditions at the time you take out the loan—and they usually stay the same for the life of the loan. This can make it easy to know how much your payment is each month. And that consistency may make it easier for you to set a budget and stick with it. 

Common types of fixed-rate loans include auto loans and home loans.

Keep in mind that fixed doesn’t mean the rate won’t ever change—it just typically won’t change due to market fluctuations. Your loan or credit card agreement should be able to explain more.

With a fixed APR, your rate could change under certain circumstances—like if you miss a payment. And if the card issuer changes your interest rate, they typically must notify you first. The Office of the Comptroller of the Currency (OCC) provides a few guidelines, saying, “The bank generally cannot change your rate during the first year after the account was opened.” After that, it must provide written notice 45 days before any change is made.

It might be rare to find a fixed-rate credit card these days. It’s more common for credit cards to have a variable APR, but some smaller financial institutions may still offer fixed-rate cards. 

And your card will typically have multiple APRs, including different ones for purchases, balance transfers and cash advances.

Here are a couple of frequently asked questions when comparing fixed and variable interest rates:

The key difference between variable and fixed interest rates is that fixed rates won’t change in most circumstances. But variable rates may increase or decrease depending on an index rate like the prime rate.

If you’re comparing credit cards, APR is one way to compare your options—along with things like rewards, benefits and fees. You can learn more about the difference between APR and interest rates and see what might be considered a good rate for a credit card.