What is a penalty APR?
A credit card’s penalty annual percentage rate (APR) is a higher-than-normal APR that’s applied for a specific amount of time if the cardholder violates the credit card’s terms by doing things like missing payments.
The good news is that you can avoid penalty APRs by understanding your card agreement and using your credit card responsibly.
What you’ll learn:
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Your credit card issuer could increase your APR for violating the card’s terms and conditions.
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Exceeding your credit limit or making late credit card payments are two actions that could result in a penalty APR.
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Using your credit card responsibly can help you avoid penalty APRs.
What triggers a penalty APR?
Credit card issuers may charge a penalty APR following missed payments or some other card term violation. Here are some examples of actions that may result in a penalty APR:
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Making late payments
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Failing to make minimum payments
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Having payments returned due to a closed account or low funds
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Exceeding the card’s credit limit
Also keep in mind that triggering a penalty APR could also mean losing any introductory APR that may be active.
How much of an increase is a penalty APR?
Not every card has a penalty APR, and there’s no standard penalty rate. The amount the APR increases with a penalty rate can vary greatly, depending on the card. But a card’s penalty APR is typically a set rate, as opposed to one based on factors like your credit scores.
How to find your penalty APR
You can find information about your card’s APR in the Schumer box in your card’s terms and conditions.
One thing to keep in mind: Federal law requires credit card issuers to provide 45 days’ notice before increasing your interest rate. And that notice will list the penalty APR and explain the reason for the change.
How long do penalty APRs last?
Credit card issuers are required to review accounts with a penalty APR after on-time payments have been made for six months. At that time, the APR may revert to the standard rate. But continued violations of card terms could result in the penalty APR staying in place longer.
How to avoid a penalty APR
You can avoid a penalty APR by understanding your credit card’s terms and using your card responsibly. Here are some tips:
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Make on-time payments each month. Note the due date for your monthly payments. Consider setting reminders or enrolling in automatic payments to avoid missed payments.
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Make at least the minimum payment. Paying less than the minimum amount due can still be considered a late payment. If you pay your bill on time and in full, it can help you avoid paying interest altogether.
What to do if you’re charged a penalty APR
If your credit card issuer has already charged a penalty APR, here are some options to consider:
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Get current on your payment and watch your spending. If you’re still using your card, remember you can avoid interest charges on new purchases by paying off your statement each month.
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Use credit responsibly. After identifying the cause of the penalty APR, consider ways to avoid repeating the issue, such as setting reminders to regularly check your credit card balance and make payments.
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Consider a balance transfer credit card. If you’re worried about being able to get back on track due to a high balance and minimum payment, a balance transfer credit card may be another option. It won’t eliminate the debt and may come with balance transfer fees, but it can be part of a strategy to pay down credit card debt.
Penalty APR FAQ
Here are the answers to a few frequently asked questions about penalty APRs:
What does ‘no penalty APR’ mean?
If a credit card is marketed as having “no penalty APR,” that means the card issuer doesn’t impose one. Not all cards have one.
How is the penalty APR different from a penalty fee?
A penalty APR isn’t the same as a penalty fee. Penalty fees are typically one-time charges, whereas a penalty APR is an increase on your interest rate. If you make a late payment on your credit card, you could be charged a late fee. And the credit card issuer may impose a penalty APR in addition to that late fee.
Does a penalty APR hurt your credit scores?
A penalty APR itself wouldn’t hurt your credit scores, but the action that triggered it could. For instance, late payments can negatively affect your payment history, an important factor that affects credit scores.
Key takeaways: Penalty APR
Not all credit cards have a penalty APR, but for ones that do, rates and terms vary by card.
Fortunately, making on-time payments every month and staying below your credit limit can help prevent penalty APRs. When you’re comparing credit cards, it’s a good idea to review the terms and conditions of each so you’re familiar with the consequences of late or missed payments.
