What is penalty APR and how do you avoid it?

You’re probably most familiar with credit card APR (annual percentage rate) as the interest charged on purchases and other transactions. A penalty APR, on the other hand, is a higher-than-usual rate that’s charged if you violate your card’s terms of service — for instance, if you fail to pay your monthly bill on time.

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

How penalty APR works

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 for a penalty APR to go into effect. When a penalty APR is triggered, your standard APR rate is replaced by the penalty APR, which will likely be much higher.

The good news is that credit card issuers can’t charge a 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.

How long does a penalty APR last?

If you get serious about paying off your balance, 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 payments. The easiest way to return to the standard APR is to address the underlying reason behind the penalty APR.

There are certain factors that will determine whether your standard APR is reinstituted, such as paying off the minimum balance, not making late payments and staying within your credit card’s limit. If you continue to engage in these behaviors, however, the penalty APR could stay in place indefinitely.

Does triggering a penalty APR affect your credit?

Yes, a penalty APR can adversely impact your credit score. Under the FICO scoring model, repeated late payments will impact the payment history category. Payment history — including credit card accounts — makes up 35 percent of your score, and a record of making late payments can weaken that pillar.

Payments that are 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. And exceeding your credit limit would 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 or your credit score don’t typically determine the penalty APR.

Most credit card issuers limit their penalty APRs, but the limit is usually a whopping 29.99 percent. That rate is nearly twice as high as the average credit card APR, which is around 19 percent, and almost certainly a lot higher than your standard APR.

Keep in mind that if you avoid the penalty rate, late payments can still cost you in other ways. After the 21-day grace period ends, 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.

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 being charged a penalty APR:

• 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 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 get rid of the penalty APR, you’ll want to keep your balance as low as possible. Try to only charge what you can afford and make sure to pay on time.
• Get organized. To break the cycle of late payments, 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 card. Look for a balance transfer credit card to lessen the burden of carrying debt with a penalty APR.

How to avoid penalty APR

As outlined in the following tips, good financial habits could prevent a lapse in your payment routine (which opens the door to a higher interest rate).

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. You might be able to avoid a penalty APR temporarily by making a minimum monthly payment, but unless you get your entire balance squared away in a timely manner, you could just be buying time.
2. Consider 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).
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 tradeoffs could include lower credit limits or fewer rewards.

Best credit cards with no penalty APR

Not all credit cards impose penalty APR punishments. 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 21 billing cycles on new purchases and on balance transfers made within the first 60 days. That gives you plenty of time to catch up on payments without accruing interest. After that, the variable APR is 15.74 percent to 25.74 percent.

This BankAmericard® credit card information was last updated on May 22, 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 18.99 percent to 29.74 percent (variable).

Discover it Cash Back: Best for cash back

If you’re looking for a cash back card with no penalty APR, the Discover it® Cash Back is a solid pick. With this card, you’ll earn 5 percent cash back on rotating categories each quarter (on up to $1,500 per quarter, then 1 percent back; activation required). 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

Penalty APR isn’t inevitable. Make your credit card payments on time each month to not only avoid penalty APR, but also to avoid late fees and 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 Citi Simplicity® Card here has been collected independently by Bankrate.com. The card details have not been reviewed or approved by the issuer.