What is a penalty APR?

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What is a penalty APR?


One of the strongest arguments for paying your credit card bills on time is that doing so allows you to avoid penalty annual percentage rates (APRs), which are increased interest rates used by lenders to encourage card holders to pay their balances on time.

But what is a penalty APR? And how long might it apply to your credit card balance?

Penalty APRs may be imposed when you miss the deadline for making a minimum monthly payment by more than 60 days.

This can immediately impact how much you may pay in interest on your balance.

According to CreditCards.com's monthly credit cards rate report in June, the national average credit card APR was 15.18 percent. However, if your bank hits you with a penalty APR after a late payment, it may be 29.99 percent or more.

Once you have a penalty interest rate, paying off your credit card debt could take longer and cost you a lot more. If your APR is increased, more of the money you pay may go toward interest, and it may affect your ability to make on-time payments in the future.

"Some credit card companies impose penalty APRs to reflect the risk of providing credit to consumers who pay their bills late," says Amos Richards, CEO of fundist.com, a lender referral website.

"It's key to note that once you receive a penalty APR, credit card companies can apply the higher rate to your current and future balances," says Matt Schulz, a senior industry analyst at CreditCards.com.

Do penalty APRs last forever?

The good news is that credit issuers are required to reconsider your penalty APR once you've made six consecutive on-time monthly payments. The act helped standardize when credit card companies must remove penalty APRs, Richards adds.

Robert Harrow, an analyst for ValuePenguin.com, notes that the federal act also generally limits credit card companies' ability to raise interest rates during the first 12 months that you have a new credit card. This prevents them from attracting consumers with low rates, then raising them once the credit card is issued.

However, if your account becomes 60 days delinquent in this time, you still can receive a penalty APR, Richards says.

The Credit CARD Act was passed by Congress to protect consumers against unfair lending practices, Schulz says. Under the federal law, if lenders want to raise interest rates for a reason other than late payments, they must give the credit card holders 45 days notice and give them the option of canceling their account, he adds.

5 tips for avoiding penalty APRs

While you could get a penalty APR removed by making timely payments for six consecutive billing cycle thereafter, it's better to avoid getting them in the first place. Here are five tips to help you keep your credit accounts free from penalty APRs.

1. Negotiate with your lender.

It could help to contact your credit card company before you miss a payment, Richards says. If you ask, they may be willing to let you skip a credit card payment or reduce your interest rate penalty. However, this is entirely at the credit card company's discretion.

Credit card expert Beverly Harzog, author of "The Debt Escape Plan," says your credit history will come under scrutiny when you negotiate. If you've had numerous late payments, working out a deal may be difficult.

"This works better if you have a great credit score," she says.

2. Read your credit card agreement.

Herzog says there's no substitute for reading your credit card agreement. Do this before you begin using your card so you know what could trigger a penalty APR.

Van Cleve adds that knowing your obligations before you begin using a credit card is very important.

"Always make sure that you understand the terms and conditions fully," he says.

3. Keep track of what you buy with your credit card.

Consumers who have bills charged to their credit cards for ongoing payments, such as gym memberships, could lose track of their spending and find themselves unable to pay their bills on time, Richards says.

To avoid this, he recommends frequently reviewing your online statements so you're aware of automatic payments and knowing when your payments are due.

The Consumer Financial Protection Bureau also recommends considering automatic debit payments from a bank account to pay your monthly credit card bill.

4. Keep your credit card balances low.

Paying more than the monthly minimum due on a credit card account helps you repay the debt more quickly, Van Cleve says. It can also reduce how much you pay in interest.

"I would advise that you limit your spending to what you can afford to pay off each month," he says. "Never get yourself in a situation where you are making [only] a minimum payment, because it's going to take a really long time to pay off the balance."

5. Consider getting a credit card with no penalty APR.

Some credit card issuers don't apply penalty APRs if you make a late payment. For example, Chase Slate® and Discover it® won't hit you with a penalty APR for late payments. However, Chase will hit you with a late payment fee of up to $37 and, while Discover will waive the late payment fee for your first time, you'll have to pay up to $37 for any late payments after that.

However, remember that no matter what, late payments can still hurt your credit score.

Bottom line

It's important to pay your bills on time, as a penalty APR could cost you a significant amount of money. However, if you have a credit card with a penalty APR, don't fret -- you may be able to remove the penalty by making six consecutive on-time payments.

In addition, by following the tips above, you may be able to avoid penalty APRs in the future.

About the Author: Emmet Pierce is a freelance writer based on the West Coast. He has developed numerous news contacts in the public and private sectors while writing about personal finance, lending, insurance, real estate, health care, technology and science.

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The logic of the penalty APR is mind bongling.  If someone had a difficult month (say they had unexpected medical bills) and was late on their payment, then the bank charges a HIGHER payment in the future.  In order to re-establish an orderly payment, wouldn't/shouldn't the lender be LOWERING the payment for the next 6 - 12 months.

It seems like the bank's perspective is "oh no they were late, we better get as much money from them before we write them off" vs (say working for a long time customer) - "oh, they had a difficult month, let's help them re-establish a long term payment amount that is in everyone's best interest."

Top Contributor
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penality apr can generally be the highest APR amount they can charge which can be up to 29.99 percent I think some will lower it back down after 6 months of on time payments but I would just pay it off as soon a possible and dump them. Reason dump them because unless lender eventually removes the late payment it will be on your credit report for as long as you have that line of credit. At least if you drop the line of credit it will fall off in 7 years because its flagged as a negative report

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