What Is a Credit Card Penalty APR and When Does It Apply?
A credit card annual percentage rate or APR represents the annualized cost of borrowing, when the interest rate and fees are factored in. Credit card companies can apply a higher penalty APR if you pay your credit card bill late.
Triggering a penalty APR can mean paying more credit card interest if you carry a balance. Knowing how penalty APR is calculated and when it applies can help you avoid a costly credit mistake.
What Is a Credit Card Penalty APR?
Your credit card can have multiple APRs, including a regular variable APR for purchases, a balance transfer APR and a cash advance APR. The penalty APR is another special rate you can be charged under certain conditions.
Specifically, a penalty APR is a higher interest rate the credit card company can charge you for paying late. This penalty APR can apply to future purchases made with the card. You can also be charged a penalty APR for any current balances you owe if you’re 60 or more days behind on payments.
How Much Is a Penalty APR for a Credit Card?
Credit card issuers can determine where to set the penalty APR for credit accounts. Penalty APRs can be fixed or variable, meaning they can go up or down based on an underlying benchmark rate.
Generally, your penalty APR may depend on:
- Movements in the benchmark rate, if the APR is variable
- Your creditworthiness
- Your account history
It’s not uncommon for credit card companies to charge a penalty APR that hovers around 29.99%. Depending on your regular variable APR for purchases or balance transfers, the penalty APR could represent a steep step-up in how much you pay in interest.
When Does a Credit Card Penalty APR Apply?
Your credit card company can kick in when you don’t pay your bill on time. Even paying one day late could result in the penalty APR being applied to your credit card account.
Depending on how late you are with making a payment, the penalty APR may only apply to any future transactions if you fail to make your minimum payment by the due date. Once you’re 60 days or more behind on paying your credit card bill, the penalty APR can also be applied to any existing balances you have.
That’s important to note because a penalty APR could cancel out any promotional rates you’re enjoying with your card. For example, if you opened a new credit card account to get a 0% introductory APR on purchases and balance transfers for the first 15 months, paying late could cost you that benefit.
When Can a Credit Card Company Increase Your APR?
The 2009 CARD Act puts some restrictions on when credit card companies can raise your APR. Specifically, your rate can’t increase during the first year unless:
- A late payment triggers the penalty APR
- Your card’s promotional APR period is ending
- You have a variable APR and the benchmark rate changes
Once your first year of card membership is up, your card issuer can raise your APR for any reason. They have to notify you first in writing about what the new APR will be and when the change will take effect.
How Long Does a Penalty APR on a Credit Card Last?
The CARD Act specifies that if a penalty APR is applied to an outstanding balance, it can only last six months. After that, your credit card company can apply the regular variable APR. But the penalty APR could stick around on future purchases after the six-month mark, depending on your account history.
For example, if you’ve only had one late payment and you’ve made at least six consecutive on-time payments since the penalty APR was introduced, the credit card company may lift the higher rate on future purchases. But if you’re in the habit of paying late, the penalty APR could be charged indefinitely.
How to Avoid a Credit Card Penalty APR
The easiest way to avoid a penalty APR on a credit card is to pay your bill early or on time each month. Scheduling automatic payments to your card from your checking account can be a simple fix. Or you could set up payment due date alerts to let you know ahead of time that you need to make a payment.
If you have a credit card that has a penalty APR already in place, paying in full each month would also allow you to sidestep interest charges. This may not be realistic, however, if you have a sizable balance.
In that case, you may be better off looking into debt consolidation with a personal loan. You can use a personal loan to pay off any credit card balances, including those with a penalty APR, then make a single loan payment going forward.
Having just one payment to make could make it easier to keep up with due dates. And the interest rate on the personal loan may be well below your credit card’s penalty APR. Compare personal loan rates and fees carefully to find the right one for your needs.
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Rebecca Lake is a freelance writer specializing in personal finance,
credit and debt. She’s a contributor to U.S. News and World Report,
Forbes Advisor and The Balance and her work has appeared online at CreditCards.com,
Money-Rates.com and dozens of other top publications.