variable APR
An interest rate on a credit card that changes based on a benchmark rate such as the prime rate.
Example
“Her variable APR rose from 19% to 23% when the Federal Reserve raised interest rates.”
Memory Tip
VARIABLE — it moves. When rates rise, your credit card debt gets more expensive.
Why It Matters
Variable APR directly affects how much interest you pay on credit card balances, and it can increase or decrease without warning, making it harder to budget and plan your finances. Understanding this term helps you anticipate potential increases in your monthly payments and make informed decisions about carrying balances or switching cards.
Common Misconception
Many people believe that variable APR changes randomly or unpredictably, but it actually moves in direct correlation with a specific benchmark rate like the prime rate. The card issuer cannot arbitrarily raise your rate; it must follow the predetermined formula tied to the benchmark.
In Practice
Suppose your variable APR credit card has a rate of prime rate plus 12 percent, and the prime rate is currently 7 percent, making your APR 19 percent. If the Federal Reserve raises the prime rate to 8 percent, your APR automatically becomes 20 percent, increasing the interest on a 5,000 dollar balance from about 79 dollars monthly to 83 dollars monthly.
Etymology
From Latin 'variabilis' meaning changeable plus annual percentage rate.
Common Misspellings
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Related Terms
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See Also
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