Penalty APRs can make paying off your credit card debt more difficult. Today we're explaining what a penalty APR is and how to avoid it.

Have you ever been late on a credit card payment, only to see your interest rate skyrocket out of control?

If so, you most likely experienced a penalty APR. Penalty APRs can hurt your credit and your ability to pay back your debt on time. In this article, we’ll review what a penalty APR is, how it’s triggered, and what you can do to avoid it.

Credit card penalty APR – what is it?

The penalty APR (Annual Percentage Rate) is an interest rate charged by credit card issuers on cardholders late in making payments. Some issuing companies provide a grace period to customers – typically a couple of days – to clear the bill before they calculate the higher interest charge.

Generally, penalty APR interest is charged at 29.99%, but it can be lower on some credit cards. 

An issuer can determine a penalty APR for customers who are over 60 days late on clearing their outstanding balance. The issuer must inform the user in writing, at least 45 days before they charge the increased APR rate.

These conditions came into effect after the Credit CARD Act of 2009, protecting the interests of consumers and putting a limit on penalty fees.

How is penalty APR triggered?

The penalty APR doesn’t kick in right away. If you miss a payment, you are charged a regular interest rate by the issuing authority which depends on your bank’s rate.

Late payments

The penalty APR usually triggers when a consumer is late in clearing the balance and appears likely to default on the card. Generally, the customer must be late by 60 days at least on the payment before the card issuer can charge the high-interest rate.

Violation of credit card terms

The credit card issuer may also impose the penalty APR on card users for violating any other terms.

Suppose you try to pay your card issuer via check and there is an insufficient balance in the bank account. The check is bounced and returned. The card issuer may trigger the penalty APR from the date the check bounced even if you have a few days left to settle the amount.

You may also trigger the penalty APR by maxing out the credit card and continuing to make transactions to go over the card limit.

How long does credit card penalty APR last?

The penalty APR can be financially damaging for a person. It not only increases the interest rate for existing debt, but it can also affect your borrowing for the future.

The period for a penalty APR varies. It is based on how much debt you owed when the penalty kicked in and how much additional money you borrowed after the penalty was triggered.

APR penalty generally lasts 6 months

Generally, the penalty APR remains effective only on the existing outstanding balance for six months. If you clear the debt and comply with your cardholder’s agreement with the issuer, the interest rate returns to the normal level after six months.

APR penalty can be indefinite

If you take on additional debt while the penalty is in effect, your card issuer may keep the penalty APR in effect for an indefinite period.

Here, the higher penalty rate only applies to the credit you take out after the penalty was triggered. You could be paying an interest rate of 29.99% on all future transactions until you clear the card completely.

What is the penalty with credit card penalty APR?

A penalty APR costs depend on how much credit you had taken on your card and the interest rate in effect when the penalty triggered.

Penalty APR depends on your current interest rate

Suppose that you had an introductory interest rate of 0% APR and you’ve failed to clear your balance and have triggered the penalty APR. In this instance, your interest rate will likely go up from 0% to 29.99%.

But if you were already paying a high interest rate of say 23.99% on the card, and triggered the penalty, your interest rate would increase to a 29.99% penalty APR. Your new interest charge will still be higher, but not by that much.

Penalty APR also depends on your total debt

Suppose that you maintain a balance of $4,000 on your credit card for six months. This is while the penalty APR on your card is in effect. At an interest rate of 29.99%, it would cost you around $600 in interest over that period of six months. If your APR was only 18% before the penalty, you would have incurred a cost of around $360 in interest and would have to pay $240 extra.

If you had a promotional rate of 0% on the card, it would not have cost you any interest.

Tips for avoiding penalty APRs

Most card issuers remove the penalty APR on the card after six months of on-time payments. However, it is much more desirable never to have to pay the penalty APR rates. The interest rate of 29.99% is high, and there are ways you can avoid paying interest at such a high rate.

Here are six things you can do to avoid paying the high interest on your credit card’s outstanding balance.

Negotiate with your lender

This is the first thing you should consider. If you believe that you will be late in paying to your card issuer, then you should contact them and see if you can negotiate a compromise. Many credit card companies will extend the due date for payment or reduce the penalties to help their clients out.

Make sure that you give your credit card provider a call before missing the payment. They will be more sympathetic to you if you inform them in advance you cannot meet the due date.

Merely requesting the company to extend your due date may not work every time. You will have a better shot of convincing your card issuer if you usually make your payments on time.

  • If you’re missing payments every few months, your credit card company will be less generous with giving you other options.
  • If you have an excellent record of clearing balances on time, they will listen to you more.

Check your credit card agreement

Read the credit card agreement and understand the policies about late payments. There is always a specific section in the mandatory disclosures that tells you what the penalty APR will be and how it will be triggered for missed payments.

If you know how the penalty APR kicks in, you can manage your card more effectively and avoid the penalty.

Manage your credit card balances

Another method to prevent a late payment is to check out every single credit card statement you get and pay them immediately. You can list month-to-month statements for every single card and examine them after the statement gets to you.

Make a habit of inspecting the list frequently to guarantee that your statements do not get lost in the mail, or the card is not utilized by a wrongdoer trying to steal your identity. You can set up an email reminder and have the statements provided direct to your email, plus examine them on a mobile phone if your credit card provider offers the option.

Keep your credit card balances low

It’s tempting to get carried away with a credit card because it allows you to spend money you do not have. But be more responsible with a credit card because you will need to repay the balance later.

Charging more of your regular shopping to your credit card increases the chance you will miss a payment eventually, leading to higher APR penalty. 

You must try your best to keep the card balance low. Just charge costs on the card you can pay for to on time. It is the best way to keep your balance in check.

Consolidate your debt

What Is A Penalty APR? Prosper 210

If your credit card debt has gone out of control and you cannot pay it back, you can take a consolidation loan to reduce the cost of your debt. You can take a personal loan through a company like Prosper, which (at the time of writing) offers a 7.19% variable APR. 

Or you can get a Home Equity Loan on a property at roughly 4%-8% interest rate. The loan can pay back your credit card balance.

A penalty APR is charged at a much higher 29.99% while the cost of a mortgage is much lower in comparison. Consolidation of your credit charge into your mortgage can be a smart option for some.

Consider getting a credit card with no penalty APR

If getting a HELOC isn’t an option and you understand that you cannot monitor your costs, then you could consider using a credit card with no penalty APR. The interest rate on a card without a penalty APR stays constant even if you are overdue on payment by months.

Very few banks offer this facility for clients. While it may be difficult to find cards with no penalty APR, they do exist.

An example of a credit card without a penalty APR

Citi Simplicity® Card

Citi Bank is known for giving great features to its clients. Their Citi Simplicity® Card has no penalty APR, annual fee, or late fee charges.

The card comes with an introductory offer at 0% APR for the first 12 months on purchases and 0% APR on balance transfers for the first 21 months.

After the introductory period, outstanding balances are charged a variable interest of 16.74% – 26.74%.

Summary

Obviously, the ideal scenario is not having a penalty APR hit your account at all. But if you’re someone who often forgets to pay their bills on time, you might want to look into a credit card that won’t hit you with a penalty APR.

Alternatively, you can set everything up on autopay so you never miss a payment. Regardless, knowing about penalty APRs and how to avoid them is critical if you’re even an average credit card user.

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About the author

Chris Muller picture
Total Articles: 181
Chris has an MBA with a focus in advanced investments and has been writing about all things personal finance since 2015. He’s also built and run a digital marketing agency, focusing on content marketing, copywriting, and SEO, since 2016. You can connect with Chris on Twitter.