What Are the Advantages of Fixed Rate Credit Cards?

There are two main types of credit card, depending on how their interest rate is determined. These are fixed rate credit cards and variable rate credit cards.

A fixed rate credit card specifies a certain rate, say 11%. A variable rate credit card pegs its rate to some independent standard, usually the Prime Rate, occasionally something else like the London Interbank Offered Rate (LIBOR), and then varies as that independent standard does. So a variable rate might be something like "Prime Rate + 7%."

A couple of quick clarifications to correct common misconceptions:

First, the contrast between fixed and variable is not the same as the contrast between introductory and non-introductory. A credit card, for example, that offers a promotional 2% interest rate the first six months which will then become a Prime Rate + 8% interest rate after that has a fixed introductory rate and a variable non-introductory rate. A credit card that offers a promotional 0% interest rate the first year which will then become a 16% interest rate has a fixed introductory rate and a fixed non-introductory rate. A credit card that offers a Prime Rate + 10% interest rate from the get go has a variable interest rate, with no distinction between introductory or non-introductory.

Second, a fixed rate doesn't mean the credit card company is never allowed to change the rate. Variable rates change automatically as whatever they're indexed to happens to change. Fixed rates (or variable rates) can also change whenever the credit card company chooses to change them "manually" as it were. Credit card companies are simply required to give the consumer adequate notice for such a change (unlike with the automatic changes of variable rates as, say, the Prime Rate changes). So they will typically enclose a note with your credit card statement (one of those fine print things everyone throws out without reading) stating that your rate is changing from 12% to 15%, or from Prime Rate + 9% to Prime Rate + 11%.

The main reason some people prefer fixed rate cards is the stability and predictability. Though the interest rate can change on a fixed rate card, it takes an active decision by the credit card company, which only happens fairly infrequently. The rate won't be bouncing up and down all the time like with a variable rate card. So people who carry a balance on their credit card find it easier to plan, easier to budget, as they can determine how much interest will be added each month.

There is also the question of which direction interest rates, or the Prime Rate specifically, are likely to go. Let's say the Prime Rate is at 4%, and you have a choice between a 12% fixed rate card, or a Prime Rate + 8% card. On the one hand, it seems like they're identical-12% either way. But you want to consider what's likely to happen moving forward with the Prime Rate. Is 4% an unusually low Prime Rate and almost all forecasters are agreed it will be increasing soon, probably by a lot? Is 4% a temporary spike up in the Prime Rate and indications are it will shortly return to something much lower?

If you expect the Prime Rate to go down, your advantage lies with the Prime Rate + 8% card. If you expect the Prime Rate to go up, your advantage lies with the 12% card.