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. A 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 a penalty APR apply?

A penalty APR is triggered when you make late payments, your payment is returned because of insufficient funds or a closed account, or you exceed your credit limit. Each credit card issuer has specific conditions that must be met to apply a penalty APR.

The penalty APR will apply to future transactions and will only be reduced if you make six months’ worth of payments on time. If you pay less than the minimum or if your payment bounces, the penalty APR may remain on your account indefinitely.

The good news is that credit card issuers can’t charge penalty APR arbitrarily. 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 a 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 a 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 a penalty APR cost?

When a penalty APR is triggered, your standard APR rate is replaced by the penalty APR. Your interest accrued is now calculated based on the penalty APR rate. 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.

Does triggering a penalty APR affect your credit?

A penalty APR can adversely impact your credit score. Under the FICO scoring model, repeated late payments will impact the category of payment history. Payments that are returned due to closed accounts and insufficient funds can also influence your payment history. And exceeding your credit limit would result in a high credit utilization ratio, which accounts for 30 percent of your FICO score. 

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 a 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. The easiest way to return to the standard APR is to address the underlying reason behind the penalty APR. 

Paying off the minimum balance, not making late payments and staying within your credit card limit will determine whether your standard APR is reinstituted.

If you continue to run the outstanding balance, however, the penalty APR could stay in place indefinitely.

What to do if you’re being charged a penalty APR

If you’re currently being charged a penalty APR, there are some measures you can take to lessen your debt. 

  • Call the issuer. Be proactive and explain the backstory on missed payments. This isn’t a guarantee that the penalty APR will be reduced, but it doesn’t hurt to present your side. 
  • Check your credit card agreement. Be clear regarding how the credit card deals with late payments and how the penalty APR applies to your balances. 
  • Refrain from using this credit card and pay off the balance as soon as possible. If you’re not able to get rid of the penalty APR, you want your balance as low as possible. Try to only charge what you can afford and pay on time. 
  • Get organized. To break the cycle of late payments, you’ll need to frequently check your balances and set reminders for payment dates. 
  • If you can’t pay off the balance, consider transferring and applying for a balance transfer credit cardFind a credit card willing to accept a balance transfer to lessen the burden on carrying debt with a penalty APR. 

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 the 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 or a sticky note on your monitor.

Choose a card without penalty APR

You might consider a credit card that doesn’t charge a 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
Former 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.
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