What is a Penalty APR? How Can You Avoid It?

If you have one or many credit cards, you can be subject to a penalty APR. Read on to learn more about this common practice by credit card companies.

What is a penalty APR, and why does it happen?

If you were to become 60 days late on a credit card payment and then paid it, you could be subject to a penalty APR. A penalty APR is when your credit card company penalizes you by increasing your interest rate to a much higher one than your regular APR.

Other factors that may cause you to get a penalty APR are based on your card agreement. Many credit card companies stipulate that having a bank check returned or going over your credit limit is also causes a penalty APR.

For example, you could go from a rate under 10% to as much as 26% or higher due to a late payment. American Express has a penalty rate of 29.99%, wow!

How much higher is a penalty APR than a regular APR?

The penalty APR varies considerably by the credit card company. The highest rate is 29.99%. This higher rate could be applied to both your current balance and future purchases if you made a payment 60+ days late. The resulting costs to you can be huge. In fact, you may end up owing more than if you got a payday loan that you paid back on time; imagine that.

How long does a penalty APR last, and how can I remove it?

If you make 6 months of payments on time, then your credit card companies are required to lower the rate on your outstanding balance back to your normal interest rate. This was put into law in 2009. However, the credit card company may keep the penalty APR on all future purchases. Most companies do this, but there are exceptions.

To learn how your card issuer handles penalty APRs, review your card's terms and conditions. There should be a section titled 'penalty APR' and look for a line that states, "How long will the penalty APR apply?" If the wording states the penalty APR may apply indefinitely, you may well end up as a victim of a perpetual penalty APR. It may seem wrong, but it is legal.

Does a penalty APR affect my credit?

All late payments, bad checks, going over your credit limits, etc., will be reported and affect your credit. The actual APR is not a direct factor, but all the actions leading up to it are.

How can I avoid a penalty APR?

The obvious answer is not to take any actions that will trigger the increased APR. But if you do make a mistake, contact your credit card company immediately as you may be able to negotiate a way out of it…in time.

The best way to avoid a penalty APR is to pay on time or get a card that does not have penalty APRs. The Citi Simplicity® Card, Discover it® Cash Back card, and Apple card are examples of cards without the penalty APR.
Establish a budget and watch your expenses, and you can avoid penalty APRs, damage to your credit scores, and other unpleasant circumstances.

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