What is penalty APR and how do you avoid it?

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Penalty APR is a type of credit card interest that does just what the name suggests: it penalizes.

You’re probably most familiar with credit card APR (annual percentage rate) as the interest charged on purchases and other transactions. Penalty APR is a higher-than-normal rate that results from violating the card’s terms of service — for example, if you fail to pay your monthly bill on time. It’s costly, harmful to your credit and commonly takes months to resolve. Fortunately, you do have ways to avoid it.

Here’s what you need to know about penalty APR, how it affects your credit and what you can do to steer clear of it.

When does penalty APR apply?

The good news is that credit card issuers can’t charge penalty APR arbitrarily. It’s triggered in specific cases, which can include late payments, returned payments or exceeding your credit limit.

With credit card APR, it’s important to remember the numbers 21, 45 and 60:

  • 21. You have a 21-day grace period from the end of a billing cycle before your card’s standard APR applies to an unpaid balance.
  • 45. Federal law requires the issuer to give you 45 days’ notice before applying penalty APR.
  • 60. The penalty APR generally comes into play when an outstanding balance hasn’t been paid in full for more than 60 days.

Read your credit card’s terms and conditions to see when you might be subject to penalty APR and what the higher rate is. Do the same with any new cards before you apply for them. Speaking of terms, don’t confuse “0% intro APR” with “no penalty APR.” Introductory zero-interest credit card offers are designed to help you temporarily avoid standard APR on purchases and balance transfers, not avoid penalties for late payments. A 0% intro APR credit card might also have no penalty APR, but don’t assume it does — always read the fine print.

How much does penalty APR cost?

Most credit card issuers limit their penalty APRs, but the limit is usually 29.99%. That rate is nearly twice as high as the current average for credit card interest, estimated in the 16% range by Bankrate, and almost certainly a lot higher than your standard APR.

Even if you avoid the penalty rate, late payments can still cost you in other ways. After the 21-day grace period, you’ll pay interest on an outstanding balance in the form of your card’s standard APR. You might also have to pay late fees.

There’s also your credit score to think about. Although penalty APR doesn’t hurt your credit score directly, payment history—including credit card accounts—makes up 35 percent of your score. A record of making late payments can weaken that pillar.

How long does penalty APR last?

If you get serious about paying off your balance, it could be as little as six months. Federal law requires your credit card issuer to review your account once you’ve made six consecutive on-time payments. If you continue to run the outstanding balance, however, the penalty APR could stay in place indefinitely.

Although you can try contacting your issuer to negotiate a lower rate, a record of late payments will likely make it difficult to successfully argue your case.

How to avoid penalty APR

Good financial habits and sound strategies, as outlined in the following tips, could prevent a lapse in your payment routine that opens the door to a higher interest rate.

Don’t carry a balance

The best way to avoid a penalty APR is simple: pay your monthly credit card bill in full and on time. You might be able to avoid penalty APR temporarily by making a minimum monthly payment, but unless you get your entire balance squared away in a timely manner, you could be just buying time.

Automatic payments

Many credit card issuers offer the option of automatic payments so that you can set a date and put your payments on autopilot. The payments are connected to your bank account, and you can choose to make a full or minimum payment (full payment is recommended).

Set reminders

If you’d rather not use automatic payments, set reminders for yourself. You can do it on your phone or computer, or take the old school approach with a circled date on a calendar, a sticky note on your monitor and so on.

Choose a card without penalty APR

You might consider a credit card that doesn’t charge penalty APR. Examples include:

Although some no-penalty-APR cards are comparable to other options, the potential tradeoffs could include lower credit limits or less in the way of rewards programs. If the card requires a good or better credit score, past troubles with late payments could get in the way of qualifying.

The bottom line

Penalty APR isn’t inevitable. If at all possible, make your credit card payment on time each month to avoid not only penalty APR but also late fees and damage to your credit score.

Written by
Barry Bridges
Senior credit cards editor
Senior Editor Barry Bridges has been writing about credit cards, personal loans, mortgages and other personal finance products since 2017. Before joining Bankrate, he was an award-winning newspaper journalist in his native North Carolina. Send your questions about credit cards (and fantasy baseball) to bbridges@bankrate.com.
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