Credit Cards Credit Card Basics Rates & Fees Understanding Your Credit Card's Variable Interest Rate By LaToya Irby LaToya Irby Facebook Twitter LaToya Irby is a credit expert who has been covering credit and debt management for The Balance for more than a dozen years. She's been quoted in USA Today, The Chicago Tribune, and the Associated Press, and her work has been cited in several books. learn about our editorial policies Updated on June 25, 2021 Reviewed by Thomas J. Catalano Reviewed by Thomas J. Catalano Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas' experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning. learn about our financial review board In This Article View All In This Article Prime Rate vs. LIBOR Fixed vs. Variable Rates Calculating Daily and Monthly Interest Notification of Rate Increases Checking Your Card Agreement Photo: shapecharge / Getty Images If your credit card has a variable interest rate, the rate will move up and down based on another interest rate, which is referred to as the index rate. Variable interest rates are most often tied to the prime rate, though sometimes the London interbank offered rate (LIBOR) is used. Prime Rate Vs. LIBOR According to the Federal Reserve Bank of St. Louis, the prime rate is the rate posted by a majority of the top 25 U.S.-chartered commercial banks. It is given only to banks' best customers and is often about 3 percentage points higher than the federal funds rate, the rate banks charge each other to lend money overnight. The Federal Reserve's Federal Open Market Committee (FOMC) sets a target for the federal funds rate but does not mandate that banks charge that rate. The LIBOR is set based on a survey of short-term rates conducted by the British Bankers' Association and calculated and reported by Thomson Reuters. LIBOR is being phased out and rates will stop being published at the end of 2021. It will be replaced entirely in June 30, 2023. LIBOR is more commonly used in determining mortgage rates than credit card rates. Fixed Vs. Variable A variable interest rate, or variable annual percentage rate (APR), might be better for the consumer when the index rate falls because the new variable rate could be lower than the rate charged on a fixed rate card. On the other hand, having a variable interest rate may not work in your favor when the index rate rises because your interest rate goes up as well. More than 90% of general purpose credit card accounts had a variable rate in 2018. By contrast, only about half of private label credit cards—those that can be used at or offer rewards for a specific retailer or other company, such as an airline—had a variable rate. The APR for private label cards in 2018 was significantly higher for private label cards than for general purpose cards: 26.4% compared with 20.3%. That's an indicator a variable rate often doesn't equate to a higher rate. Calculating Daily and Monthly Interest Using the APR The APR on your credit card is the interest rate applied to your outstanding balances over the course of a year, but your credit card lender will use that rate to calculate daily and monthly rates. The daily rate is generally the APR divided by 365, so for a card with an APR of 23.3%, the daily rate would be 0.0638%. The daily rate is used to calculate interest on the outstanding balance every day of the monthly statement period. Each new bit of interest is used in the calculation of the next day's interest until the lender produces a new monthly bill. Note As your finance charges get larger and larger, more of your monthly payment will go toward interest, and it will take longer to pay off your balance. Notification of Rate Increases A credit card issuer must give you 45 days notice before increasing your interest rate on new purchases. The company may not increase your rate on new purchases within the first year after your account is opened. The issuer may raise your rate on existing balances for a variable rate account if the index to which the rate is tied goes up. If your rate is tied to the prime rate, you should pay attention to the FOMC's actions to get an idea of whether your rate is likely to go up or down. The issuer may also change your rate on existing balances if the rate was designed to be temporary, such as for a balance transfer, or if you were more than 60 days late making a minimum payment. Note If your rate was increased because you were late with a payment, you can get it reduced to the original rate if you make six consecutive on-time payments. Checking Your Card Agreement Check a recent copy of your credit card statement or your credit card agreement to see whether your card has a variable interest rate. You can request a copy of your credit card agreement through your card issuer's website. You can also look for the agreement in the Consumer Financial Protection Bureau's agreement database. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Bureau of Consumer Financial Protection. "The Consumer Credit Card Market, August 2019," Page 10. Bureau of Consumer Financial Protection. "The Consumer Credit Card Market, August 2019," Page 59. Federal Reserve Bank of St. Louis. "Bank Prime Loan Rate (DPRIME)." Nasdaq. "Libor, the Federal Funds Rate, and the U.S. Prime Rate: A Primer." Bureau of Consumer Financial Protection. "The Consumer Credit Card Market, August 2019," Page 12. Discover. "How Does My Credit Card Interest Work?" Consumer Financial Protection Bureau. "When Can My Credit Card Company Increase My Interest Rate? What Can I Do to Get the Rate Back Down?"