Penalty APRs 101

Borrowing, Credit Cards

You shopped around to find the credit card with the best annual percentage rate (APR) for your qualifications. Maybe you’ve got a lower rate than the average – around 17%. The last thing you want to do is incur a penalty APR that ruins your hard work.

If you’ve missed a credit card payment for at least sixty days, your account may be subject to a higher interest rate known as a penalty APR. The penalty APR represents your increased risk in the card issuer’s view – if you’ve missed one payment, you’re more likely to miss other payments.

You can be assessed a penalty APR for reasons other than missed payments, depending on your card issuer’s policy. Examples include returned payments, making charges past your credit limit, or defaulting/missing payments on a different account with the same card issuer.

Penalty APRs can be up to 29.99%, but may be lower depending on your card’s terms and your creditworthiness. Review the terms and conditions section of your cardholder agreement for penalty APR details. There will be a separate section under the explanation of interest rates stating the penalty APR rate and when it applies.

Generally, penalty APRs will apply to both the outstanding balance and to new purchases made while the penalty APR is in effect. That means you may have to pay a much higher rate than you planned when you actually used the card for purchases.

If you make six months of on-time payments after incurring the penalty APR, the card issuer is required to reduce the APR on your outstanding balance back to the original APR. A card issuer may lower the APR earlier if they choose to.

However, there’s no obligation to lower the APR on future purchases. A single mistake could lock in your penalty APR on new purchases for as long as the credit card issuer decides to keep it there. The card issuer may review your record to see if a lower rate on new purchases is warranted, but the issuer isn’t obligated to make any changes.

Note that when penalty APRs are invoked, you may lose any introductory rates and other perks may be rescinded. Again, check your terms and conditions page for all possible effects.

Penalty APRs are simple to avoid – just make payments on time. Use reminders, alerts, automatic payments, or whatever it takes to get your payments in.

However, if it’s too late for that, make sure you make payments on time to avoid extending the penalty period. Even if it’s only the minimum payment, you’re better off making it on time to prevent the added effect of the penalty APR. Try to cut your spending so you can make future payments in full, avoiding further interest charges.

If you know you won’t be able to make at least the minimum payment on time, try contacting your credit card company and explaining the situation. You may be able to negotiate a payment plan and avoid a penalty APR.

If you’re concerned about penalty APRs, consider switching to a card that has doesn’t have one. Most major credit card issuers offer such a card – but you may have difficulty qualifying for one if you’ve recently missed payments. Review credit union options if you qualify, as they may offer lower rates and less punitive measures.

You can also consider switching to a balance transfer card with a 0% APR period – if you can qualify for one. Use the introductory period to pay down the accumulated interest quickly. If you want more credit, check out our list of balance transfer credit card offers.

Avoid penalty APRs whenever possible – but make sure that you understand how they apply to your credit card, just in case.

Missing payments won’t just negatively affect your credit card APR. On-time payments are also the most important factor used in determining your credit score. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.

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