What Is a Variable APR?

What Causes Variable APRs to Change?

Variable APRs rely on a benchmark rate that can fluctuate over time. The most common benchmark rates include the prime rate and the Secured Overnight Financing Rate (SOFR):

• Prime rate: The prime rate is a benchmark most financial institutions use to determine APRs for credit cards and lines of credit; it's partially based on the federal funds rate, which is the interest rate banks charge each other to borrow excess reserves on an overnight basis.
• SOFR: Similar to the federal funds rate, the SOFR is the interest rate at which banks borrow and lend money to each other on an overnight basis. The difference is that transactions made using the SOFR use Treasury bond purchase agreements, with the bonds acting as collateral to secure the loans. The SOFR is primarily used for adjustable-rate mortgages and some private student loans

The federal funds rate, which helps determine the prime rate, is determined by the Federal Open Market Committee (FOMC), which is part of the Federal Reserve. The FOMC may raise or lower the federal funds rate to respond to market conditions—the rate typically goes up to constrict access to cash during inflationary periods and down during times of economic distress to allow for greater ease of borrowing.

In contrast, the SOFR is based on transactions in the Treasury repurchase market and fluctuates daily.

On certain loans, your rate may change every six to 12 months, and there may be limits on how much your rate can go up or down. With credit cards, a change to your variable APR typically comes shortly after a change to the prime rate.

Other Times Your APR Can Change

While variable APRs are designed to fluctuate, there may be other situations where your APR can change, particularly if you have a credit card:

• You're at the end of an introductory 0% APR. If you have an intro 0% APR credit card or a balance transfer credit card, you'll only get that rate for the stated period. After that, the variable APR will jump to the card's ongoing APR, which is based on your creditworthiness. As of the first quarter of 2022, the average credit card APR was 16.17%, according to the Federal Reserve.
• You're late on payments. If you're late by 60 days or more on a credit card payment, your card issuer may assess a penalty APR, which is typically higher than the regular purchase APR. However, not all credit cards have a penalty APR. If you want to restore your card's regular APR, you'll need to get back on track by making consecutive on-time payments.
• Taking out a cash advance. Most credit cards charge a higher rate on cash advances. What's more, cash advances don't enjoy the same grace period that you get with purchases, which means that interest starts accruing immediately.

What to Do if Your Variable APR Changes

Changes to a variable APR are inevitable, but that doesn't mean you don't have choices. Here's what you might consider:

• Get a new credit card. If your credit has improved since you opened your current card, you may research other cards that offer a lower APR. Keep in mind, though, that if your variable APR went up because of a change in market rates, the same is true for any other card you choose.
• Pay off your balance. It's ideal to pay your credit card balance in full every month, but if you haven't been, make it a priority now to avoid the higher interest costs. The same is true if you have a personal loan or home equity line of credit.
• Refinance your loan. If you have a loan with a variable interest rate, such as a student loan or adjustable-rate mortgage, an increase in your APR may mean it's time to refinance and replace it with a fixed-rate loan. While the new fixed rate may be a bit higher, it'll keep your interest costs and monthly payment from increasing over time.