Variable vs. Fixed Rate
Whether the credit-card plan uses a variable or fixed rate in charging interest can have a significant effect on what you pay to use your card.

Variable Rate
Credit-card companies that issue variable-rate plans use indexes such as the prime rate, the one-, three- or six-month Treasury Bill rate, or the federal funds or Federal Reserve discount rate. (Most of this can be found in the money or business sections of major newspapers. See the list of links at the end of this article for more information.)

Once the interest rate corresponding to the index has been identified, the credit-card issuer then adds a number of percentage points -- called the margin -- to this index rate to come up with the rate the consumer will be charged. In some cases, the issuer might choose to use another formula to determine the rate to be charged. These issuers multiply the index or index plus the margin by another number, the "multiple," to calculate the rate.

Fixed Rate
Take a good look at fixed-rate plans. They may be a couple of percentage points higher than a variable rate, but you will have the advantage of knowing what your interest rate will be. Variable rates are just that -- they change -- and can increase (usually the case) or decrease your finance charges.

If your rate is fixed, the Truth in Lending Act requires the lender to provide at least 15 days notice before raising the rate. In some states, there are laws that require more notice.

Some financial analysts argue that because a fixed rate can be increased with only a 15-day notice, this plan is not that different from a variable-rate plan, which is subject to change at any time. They advise looking closely at both plans. If you do choose a variable-rate card, check to see if there are caps on how high or how low your interest rate can go. If the lowest variable rate possible on your card, for example, is 15.9 percent, and rates are trending downward, you may want to switch your card to another lender.

Few experts will argue with the fact that a low interest rate is a good thing. To illustrate the importance of a low interest rate, let's look at a simple example of how much your annual savings might be if you switch to a credit-card plan with a lower interest rate and no annual fee. In our example, the average monthly balance carried forward equals $2,500, which is about the national average for consumers with credit-card debt. Total annual savings in this example -- $120.

Plan Terms Plan A Plan B
Average monthly balance $2,500 $2,500
APR 0.18 0.14
Annual finance charges $450 $350
Annual fee $20 $0
Total cost $470 $350

Regardless of which plan you choose, you're going to be making payments. Let's take a look at how this is done.