What Is a Penalty APR?

One of the lesser-known, yet most damaging effects of a late credit card payment is a penalty APR. In short, they're a higher annual percentage rate (APR) that your credit card issuer charges you after you make a late payment, exceed your credit limit, or have a payment returned. Here's a brief overview of how penalty APRs work and how you can avoid them or get rid of them.

What is an annual percentage rate (APR)?

Annual percentage rate is an annualized representation of your interest rate. Usually, credit card APRs are variable and depend on your card and your credit score. Banks can change this at any time and they don't have to inform you of the change as long as it's outlined in your cardholder agreement.

Credit cards accrue interest daily and it posts to your balance monthly. To figure out how much you'll pay in interest in a month, you divide your APR by 365 and then multiply this by the number of days in your billing cycle and your outstanding balance.

An APR only kicks in once the grace period expires. Usually, you have at least 21 days from the end of the billing cycle to pay your bill, and if you do so, your card issuer won't charge you interest at all. But if you carry a balance, you'll probably see it grow quickly.

What is a penalty APR?

A penalty APR is a higher APR that some credit card issuers charge you if you're behind on your payments, you max your card out, or you pay your bill with a check that bounces. The penalty will apply to your current debt balance on your card, as well as any future charges that you make on the card.

Some creditors charge a lower amount for their penalty APR, but the specific penalty rate is determined by your credit card company and could go as high as 29.99%. It won't affect you if you don't carry a balance, but if you do, that balance will grow more quickly and could even balloon out of your control.

When does a penalty APR apply?

Penalty APRs are most commonly triggered when your payment is at least 60 days late. But card issuers can also charge you a penalty APR for other things, like exceeding your credit limit or having a check returned. Your cardholder agreement should outline what the penalty APR is for your card and under what instances it would apply.

Legally, your card issuer can only charge you a penalty APR for up to six months on your existing balance, assuming you don't repeat the mistake that landed you with the penalty APR in the first place. Once the six months are up, the penalty on your current balance must go back to the card's standard rate.

But the card issuer can continue to charge you the penalty APR on all future purchases, which could make the card very costly if you carry a balance. If you have multiple cards with the same issuer, it can actually charge you a penalty APR on all of your cards, even if you only paid late on one. However, a late payment on one credit card won't affect your rates with a different credit card company.

How much does a penalty APR cost?

The actual cost of a penalty APR depends on your balance, what your APR was before, and what it is now. If you have a $5,000 balance with a 16% standard APR, you'd pay $416.34 in interest over six months. But if you'd had a 29.99% penalty APR in place during that time, you'd now pay $808.52 in interest -- nearly $400 more.

If you were under a 0% introductory APR at the time you triggered the penalty APR, you'd end up paying over $800 more than you would've had to. So you definitely want to avoid this at all costs.

How can you avoid a penalty APR?

Paying your bills on time is key to avoiding penalty APRs. If you're prone to forgetting about them, see if you can set up automatic payments or set reminders for yourself. Make a note of the due date on each of your bills and do everything you can to make at least the minimum payment by this date.

You should also read through your cardholder agreement to learn about any other situations that could trigger the penalty APR and avoid these as well. If you have any questions about your credit card's terms, reach out to the issuer for clarity.

How can you get rid of a penalty APR?

Getting rid of a penalty APR can be complicated. Card issuers can legally charge you the penalty on new purchases and your existing balance for six months, so there's little chance of getting rid of it before then without closing the card.

If your card issuer is still charging you the penalty APR on new purchases after six months, contact the company and request that it lower your APR. Highlight your good payment history since the triggering incident if you've paid your bill on time. Your card issuer may not comply, but it never hurts to ask.

When that doesn't work, consider opening a balance transfer card instead. There's usually a fee associated with this, but these cards offer 0% introductory APRs for somewhere between six and 21 months normally. During this time, your balance won't accrue interest at all, unless you're unfortunate enough to trigger another penalty APR.

You could also try a personal loan. These loans can also have high interest rates because they don't require collateral, but they give you fixed monthly payments. So you won't have to worry about your balance growing anymore as long as you don't rack up new credit card debt.

Penalty APRs can make an already complicated financial situation even worse, so you want to avoid them at all costs. If you've been known to carry a balance or make a late payment from time to time, check your cardholder agreements right away to see if you could be paying a penalty APR. If so, take the steps listed above to start getting your debt back under control.

Still have questions?

Here are some other questions we've answered:

• What Is a Good APR for a Credit Card?
• What Is APR and What Does It Mean for Your Credit Cards?
• APR vs. Interest Rate: What's the Difference?