Published in: Credit Cards | June 10, 2019

What's a Penalty APR?

Penalty APRs can cost you a ton of money. Here's what they are and how to avoid them.

Stack of bills marked with Past Due and Account Closed stamps.

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Paying late on a credit card has a number of consequences -- including potential damage to your credit score. One of the most serious of the consequences that could occur due to a late payment is a penalty APR.

A penalty APR is a very high annual percentage rate that your creditor can charge you. You have to do something to trigger it -- hence the name penalty. While a late payment is an especially common reason for a penalty APR to be imposed, there are other potential reasons.

It’s important to understand how penalty APRs work, what could trigger them, and how they could cost you.

What is a penalty APR?

Penalty APRs are high interest rates -- but the specific penalty rate is determined by your credit card company. A penalty APR could go as high as 29.99%, but some creditors charge a lower amount for their penalty APR.

Penalty APRs change the current interest rate that you were paying on your credit card. They can even change a promotional 0% APR that you had on your card. The penalty APR will apply to your current debt balance on your card, as well as any future charges that you make on the card.

What triggers a penalty APR?

Penalty APRs are usually triggered when you are very late on a payment -- typically at least 60 days late. Your card issuer could also impose a penalty APR for other violations of your cardholder agreement.

For example, in some cases, a penalty APR will be triggered if you send in a check to pay your creditor and the check bounces and is returned. Or a penalty APR could be triggered if you max out the credit card and go over your credit card limit.

How long is a penalty APR in effect?

Penalty APRs can raise the interest rate on existing debt as well as future charges. But the amount of time the penalty APR can apply will vary depending whether you already owed the debt or incurred it after you triggered the high penalty rate.

As long as you don’t pay late again, the penalty APR can remain in effect on the existing balance for only six months. After that time, as long as you’ve complied with your cardholder agreement, your interest rate will return to the normal rate.

The card issuer can keep the penalty APR in effect indefinitely for any debt incurred after the penalty rate was triggered, however. This means that you may continue to owe that 29.99% rate on all future charges you make on your card.

Not all card issuers continue to apply the penalty APR on future purchases, so you’ll need to read the fine print on your credit card agreement or check with your creditor to find out their policies.

How much can a penalty APR cost you?

The cost of a penalty APR will depend upon the amount of debt that you carry on your card as well as how much of an increase in interest occurs. If you previously had a 0% APR and you trigger a penalty APR, your interest rate could go from nothing to 29.99% -- which is a huge jump. But if you were already paying 25.99% on your card and you jump up to a 29.99% penalty APR, your debt will cost more but not that much more.

Say you maintain a $5,000 balance on your credit card for the six months while your penalty APR is in effect. At 29.99% interest compounded daily, you’d incur $808.52 in interest over that six month period. If your APR was previously at 16%, you’d have only incurred $416.34 in interest.  And, of course, if you’d had a 0% promotional rate in effect, you’d have incurred no interest costs at all.

That penalty APR comes at a really big cost -- so you’ll want to do everything you can to avoid triggering it.

How can you avoid the costs of a penalty APR?

If you trigger a penalty APR on your credit card, you can try to avoid the big added expenses associated with having a higher interest rate.

One option you have is to pay off the entire debt balance you owe and stop making future charges on the credit card. Of course, you may not have the cash to do this. In that case, you could use a balance transfer credit card to move the outstanding debt balance to a new card, or take out a personal loan at a lower interest rate and use the proceeds from that loan to pay off your credit card debt.

If you use a balance transfer card or personal loan to pay off your debt and avoid the penalty APR, make sure to look for a card with a 0% promotional rate or a personal loan with the lowest interest rate possible.

Always check for balance transfer fees, as some credit cards charge a small percentage of the transferred balance -- usually around 3–4%. Paying a balance transfer fee can make sense if it’s the only way to escape the 29.99% interest rate, but there are many cards with promotional 0% rates and no fees, so consider those cards first. Be aware that if you don’t pay off the transferred balance before the 0% rate expires, your rate could go up dramatically.

You could also try negotiating with your creditor. If you have generally paid on time and been a good customer for your card issuer, they may be willing to waive the penalty APR and not impose this consequence on you as a result of a single mistake.

The best way to avoid the cost of a penalty APR is not to trigger one in the first place. So try to avoid late payments, returned checks, or otherwise violating your credit card agreement.

Penalty APRs are bad news

You definitely don’t want to trigger a penalty APR and deal with added interest costs on your credit cards. Fortunately, if you make your payments on time and are a good customer, you can avoid this consequence.

If you do accidentally trigger a penalty APR, there are things you can try to reduce the added costs so your debt doesn’t become much more expensive than you planned. Just be sure to take action ASAP to keep your interest costs as low as you can.

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