What is a credit card penalty APR and how can you avoid it?
Credit card interest rates have been sitting near record highs recently — and while the average card rate is slightly below the most recent average of nearly 23%, today's credit card rates are still hovering close to 22%. At that rate, the average credit card balance, which is closing in on $8,000, could accrue a hefty amount of interest over time if you're paying just the minimum, especially as the interest charges compound.
But that's just the regular interest rate. What cardholders may not realize is that most credit card issuers include a penalty annual percentage rate (APR) in their cards' terms and conditions, which is higher than the standard interest rate. The penalty APR only applies to your account in specific situations, but you'll want to avoid this type of rate whenever possible, as it can become a costly part of your card usage.
So what exactly is a credit card penalty APR — and how can you avoid it? That's what we'll discuss below.
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What is a credit card penalty APR?
A penalty APR is an interest rate that card issuers can apply to your account in place of your standard APR if your payment is late by 60 days or more. The penalty can also be applied if your payment is returned or you exceed your credit limit (depending on the credit card issuer).
The penalty APR is higher than the standard APR on your credit card, and a rate of up to 29.99% is common. The penalty APR is typically applied to any future purchases you make while the penalty is still in effect — and may also be applied to your current balance, depending on the card issuer's terms. That, in turn, could have a big impact on the amount of interest you're paying on your revolving balance.
Keep in mind, though, that your penalty APR won't take effect without warning. By law, your credit card issuer has to inform you of a rate increase at least 45 days before the change takes effect, according to the Consumer Financial Protection Bureau (CFPB). Your credit card's penalty APR cannot last indefinitely, either. Credit card issuers are required to remove the penalty APR from your account after you make six consecutive on-time payments. It's important to understand, though, that even one late payment during the six-month period can restart the clock.
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How to avoid credit card penalty APRs
The easiest way to avoid a credit card penalty APR is to make at least the minimum payment on your account every month. If you know you're going to make a late payment, it may be worth contacting your credit card issuer beforehand to find out what you can do to avoid this type of penalty. If you're facing a temporary financial setback, be sure to ask about any available hardship programs during this call.
If you haven't done so already, you should also set up automatic payments on your credit card accounts for at least the minimum payment amount that's due each month. Doing this helps ensure you're meeting at least the minimum requirements necessary to avoid a penalty APR.
You should also ensure that the bank account you're using to make payments on your credit card contains sufficient funds. A returned payment could activate your penalty APR, depending on your issuer's rules, so having enough in the account to cover the payment is crucial. If your credit card issuer applies a penalty APR when you exceed your credit limit, be sure to also keep an eye on your balance to ensure it's under the limit.
How to get rid of a penalty APR on your credit card account
If your credit card debt has become so overwhelming that you're already dealing with penalty APRs, the good news is that you have some options for getting rid of this type of issue. While you can make the six consecutive payments required to rid your account of the penalty APR, if that's unaffordable, it may be time to consider your debt relief options, like credit card debt forgiveness or a debt management program.
For example, the goal of debt forgiveness is to negotiate lump-sum settlements with your card issuers. While that won't remove the penalty APR from your account, if the negotiations are successful, you may be able to pay 30% to 50% less than what you currently owe to settle your debt, providing serious relief. If you take advantage of a debt management plan, the credit counseling agency you're working with can try to negotiate lower interest rates on your credit cards, effectively "removing" the penalty APR from the equation.
The bottom line
Credit card penalty APRs can temporarily increase the amount of interest you pay on your credit cards. However, if you make your minimum payment on time every month, don't exceed your credit limit and make sure there are no returned payments on the account, you can typically avoid this type of penalty. If you do find yourself in this situation, though, don't panic. There may be ways to get rid of the penalty APR on your account, whether that's making six consecutive on-time payments or taking the debt relief route. Either way, you won't be saddled with the penalty APR indefinitely — not if you take some proactive steps, anyway.
