What is penalty APR and how do you avoid it?

You’re probably familiar with credit card APRs (annual percentage rates) as the interest charged on purchases and other card activity like balance transfers and cash advances. A penalty APR, however, is a significantly higher “punishment” APR that kicks in if you fail to pay your bill on time, have a payment returned for insufficient funds or otherwise violate your card’s terms.

Penalty APRs are expensive and may take months to resolve. Fortunately, there are ways to avoid them in the first place.

How does penalty APR work?

A credit card issuer can assess a penalty APR when you make late payments, your payment is returned because of insufficient funds or a closed account, or you exceed your credit limit. That penalty APR will replace your regular APR and will likely be much higher than your existing interest rate.

The good news is that credit card issuers can’t charge a penalty APR arbitrarily. With credit card APRs, it’s important to remember the numbers 21, 45 and 60:

• 21. By law, issuers must give you at least 21 days from when your statement is generated at the end of a billing cycle to your payment due date. In most cases, that stretch is also an interest-free grace period, but that isn’t mandated by law.
• 45. Federal law requires the issuer to give you 45 days’ notice before applying a penalty APR. The notice should include the penalty rate and the reason for the penalty.
• 60. The penalty APR generally comes into play only after you’ve failed to make a payment for at least 60 days.

Each credit card issuer outlines the conditions that could prompt a penalty APR in your credit card’s terms and conditions document. It’s wise to read that document carefully before applying for any new card.

How long does a penalty APR last?

The penalty APR could last as little as six months. Federal law requires your credit card issuer to review your account once you’ve made six consecutive on-time monthly payments. The easiest way to return to your standard APR is to address the underlying reasons behind the penalty APR.

Actions that can influence your issuer to reinstate your standard APR include paying off the minimum balance, making on-time payments and staying within your credit card’s limit. Conversely, If you continue to engage in negative behaviors, the penalty APR could remain indefinitely.

Does triggering a penalty APR affect your credit?

No, a penalty APR won’t directly impact your credit score. The factors leading to the penalty APR, however, certainly can adversely affect your credit. Under the FICO scoring model, repeated late payments impact the payment history category. Payment history — including that of credit card accounts — makes up 35 percent of your score, and a record of making late payments can weaken that pillar.

Payments returned due to closed accounts and insufficient funds can also influence your payment history — especially if you fail to resolve the issue in a timely manner.

Lastly, depending on your other available credit, exceeding your credit limit on a card could result in a high credit utilization ratio, which accounts for 30 percent of your FICO score.

How is penalty APR calculated?

The penalty APR is usually a predetermined rate you can find in a card’s terms and conditions. Factors like your credit card balance and your credit score don’t typically determine the penalty APR.

Most credit card issuers limit their penalty APRs, but the limit is often a whopping 29.99 percent. That rate is substantially higher than the average credit card APR, which is around 20 percent, and almost certainly a lot higher than your standard APR.

Keep in mind that even if you avoid the penalty rate, late payments can still cost you in other ways. Unless you’re in the midst of a promotional 0 percent APR period, you’ll pay interest on your outstanding balance. If you are taking advantage of a 0 percent period when you miss a payment or otherwise trigger a penalty APR, the card issuer could revoke that promotional rate.

You may also be on the hook for late payment or other fees.

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

Here are some measures you can take to lessen your debt if you’re currently subject to a penalty APR:

• Call the issuer. Be proactive and explain the backstory on missed payments or whatever triggered the penalty APR. 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 sure to understand how your credit card issuer deals with late payments and how the penalty APR applies to your balances.
• Limit using this credit card and pay off balances as soon as possible. If you’re not able to reverse the penalty APR, you’ll want to keep your balance as low as possible. Make it a priority to pay off that balance as soon as you can.
• Get organized. To break the cycle of late or missed payments, frequently check your balances and set reminders for payment dates. Better yet, set up automatic payments of at least the minimum amount due.
• If you can’t pay off the balance, consider applying for a balance transfer credit card. Look for a balance transfer credit card to lessen the burden of carrying debt subject to a penalty APR.

How to avoid penalty APR

Good financial habits are the key to avoiding penalty rates and many other fees.

1. 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. If nothing else, avoid the penalty APR by making a minimum monthly payment by the due date each billing cycle.
2. Consider automatic payments. Many credit card issuers offer the option of automatic payments so you can set a date and put your payments on autopilot. The payments draw from your bank account, and you can choose to make a full or minimum payment (full payment is recommended).
3. Set reminders. If you’d rather not use automatic payments, set reminders for yourself. You can do it on your phone or computer, set text or email reminders through your issuer, or take the old-school approach with a circled date on a calendar or a sticky note on your monitor.
4. Choose a card without a penalty APR. As a safeguard, you might want to consider a credit card that doesn’t charge a penalty APR, some of which are listed below. Although some no-penalty-APR cards are comparable to other options, the potential trade-offs could include lower credit limits or fewer rewards.

Best credit cards with no penalty APR

Not all credit cards impose penalty APRs. Here are some of the best credit cards available with no penalty APR:

BankAmericard® credit card: Best for a 0% intro APR on purchases and balance transfers

The BankAmericard® credit card* doesn’t charge a penalty APR, and it’s especially useful if you have existing credit card debt you’re looking to transfer to a new card. This card comes with a 0 percent intro APR for 18 billing cycles on balance transfers made within the first 60 days as well as on purchases. That gives you plenty of time to catch up on payments without accruing interest. After that, the variable APR is 16.24 percent to 26.24 percent.

This BankAmericard® credit card information was last updated on Sept. 19, 2023.

Citi Simplicity® Card: Best for a 0% intro APR on balance transfers

The Citi Simplicity® Card* is another great no-penalty-APR card for balance transfer seekers. It comes with a 0 percent intro APR for 21 months on balance transfers made within the first four months, along with a 0 percent intro APR on purchases for 12 months. However, after the intro period ends, the ongoing APR range is on the higher end at 19.24 percent to 29.99 percent (variable).

Discover it® Cash Back: Best for cash back

If you’re looking for a cash back card with no penalty APR, Discover it® Cash Back is a solid pick. With this card, you’ll earn 5 percent cash back on up to $1,500 spent each quarter in rotating categories (activation required). After reaching the cap and on other purchases you’ll earn 1 percent cash back. There’s also no fee for your first late payment (up to $41 after that).

Petal® 2 “Cash Back, No Fees” Visa® Credit Card: Best for no credit history

This card is beginner-friendly for several reasons. On top of having no penalty APR, the Petal® 2 “Cash Back, No Fees” Visa® Credit Card* is also one of the most accessible rewards credit cards for credit newcomers since it doesn’t require a credit history or a security deposit.

The bottom line

A penalty APR isn’t inevitable. Make your credit card payments on time each month to not only avoid a penalty APR, but also to avoid late fees and possible damage to your credit score.

If you’re worried about the possibility of triggering a penalty APR, consider a credit card that doesn’t impose a penalty rate. Although you’ll still be responsible for fees and interest charges, your APR won’t increase as a result of your account activity.

*The information about the BankAmericard® credit card, Citi Simplicity® Card and Petal® 2 “Cash Back, No Fees” Visa® Credit Card here has been collected independently by Bankrate.com. The card details have not been reviewed or approved by the issuer.