What is a variable interest rate on a credit card?

A variable interest rate on a credit card is an interest rate that goes up and down with the index rate it’s tied to, which is most often the Prime Rate. The Prime Rate is the interest rate banks give to the most creditworthy borrowers. The Prime Rate goes up and down, too, usually based on adjustments to the Federal Funds Rate, which changes based on the economic climate. Most credit cards today have a variable interest rate, which is sometimes signified by a “(V)” next to the card’s APR.

Most Important Things About Variable Interest Rates

• What they are: Variable interest rates are interest rates based on the banking system's fluctuating rate, usually in accordance with the Prime Rate.
• How they fluctuate: Variable interest rates change as often as the Federal Funds Rate changes. In a growing economic climate, the Federal Reserve will usually raise rates to curb inflation. In an economic downturn, they’ll lower rates. In normal economic periods, changes to the Federal Funds Rate happen in small increments - half a percent here and there - over a span of years.

When the economy is in trouble, however - such as during the 2008 financial crisis or the COVID-19 pandemic - the rate may drop quickly and significantly. The Prime Rate will change according to the Federal Funds Rate, and that change will eventually reflect on any variable interest rate credit cards. However, credit card companies have been known to raise the margin they add to the Prime Rate in order to keep rates high for new offers.

Fixed vs. Variable Credit Card Interest Rates

The alternative to a variable interest rate is a fixed interest rate - an interest rate that doesn’t change with any index rates. But fixed interest rate credit cards are virtually nonexistent these days, mostly due to the rules set in place by the CARD Act, which stipulates that card issuers can’t change their interest rates whenever they want. Because of the law, fixed interest rate credit cards wouldn’t be very lucrative to credit card companies in a changing economy.

If you're looking for a low interest credit card to finance your purchases, feel free to also check out some of the best 0% intro APR credit cards. But keep in mind that once the introductory rates are over, your remaining balance will be subject to the regular APR.