What is a penalty APR and why should you care?

Man holding credit card while pondering penalty apr, trying to figure out what is penalty apr.Image: Man holding credit card while pondering penalty apr, trying to figure out what is penalty apr.

In a Nutshell

Penalty APRs can cause major financial strain on your budget. In order to avoid penalty APRs, you must first know what they are and what causes them.
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Are you being charged a penalty APR on your credit card?

If you’ve made a payment 60 or more days late, you could be subject to a penalty annual percentage rate, or APR, which is a higher APR that may be applied to existing and future balances. A 60-day late payment is the most common reason a penalty APR can be applied to your account, and thankfully it’s pretty easy to avoid if you stay on top of your bills.

But why do credit cards charge penalty APRs in the first place? When cardholders pay late, the credit card issuers take on the additional risk that the consumer may not pay at all. Card companies use penalty APRs as a way to offset that risk and to encourage cardholders to make their payments on time.

Keep reading to learn more about how penalty APRs work, as well as tips for how to avoid them.



How do penalty APRs work?

Penalty APRs can reach as high as 29.99% but are sometimes lower depending on the credit card. The higher rate may be applied to both your current balance and future purchases after you’ve made a payment 60 or more days late. It can also be applied if you commit another action that allows a penalty APR to be applied according to your card agreement. This includes having a check returned or going over your credit limit.

If one or more late payments will result in a penalty APR being applied, your credit card must notify you on your statement.

Keep in mind, penalty APRs can wipe out an introductory 0% APR offer on purchases or balance transfers — in addition to a card’s regular interest rate.

Do penalty APRs last forever?

After six months of on-time payments, credit card companies are required to lower your rate on your outstanding balance back to your normal interest rate thanks to the CARD Act of 2009, but the company may keep the penalty APR on future purchases.

Some credit card companies don’t take advantage of keeping the penalty APR on future purchases and will reduce your rate wholesale after six (or less) months of on-time payments, but don’t count on it.

To see how a card issuer handles penalty APRs, look for the card’s terms and conditions. Check the penalty APR section carefully for a line that says “How long will the penalty APR apply?” If the line states the penalty APR may apply indefinitely, you could end up as a victim of a perpetual penalty APR. If you can’t find information in the terms and conditions, call the card issuer to see how it handles the removal of penalty APRs.

Even if a penalty APR is applied forever, you don’t have to be stuck paying up to a 29.99% APR.

Another option is applying for a different credit card to get back to a regular APR. You could even use a balance transfer to move the remaining amount owed on the card with a penalty APR to a new card in order to lower the APR you pay.

5 tips for avoiding penalty APRs

While some cards allow you to redeem yourself from paying a penalty APR on future purchases after six months of on-time payments, it’s much more beneficial to never pay a penalty APR in the first place. These five tips could help you do just that.

1. Negotiate with your lender

Are you sure your next credit card payment will be late? Try giving your credit card company a call before you miss the payment to see what it can do. Sometimes it’ll let you skip a payment, reduce your penalties or help you set up a payment plan.

Of course, simply asking doesn’t always work. It tends to have the best shot of working if you generally make your payments on time. If you’re missing payments left and right, credit card companies may be less generous with alternative solutions.

2. Read your credit card agreement

Make sure that you’re an informed consumer and read your card agreement. There’s a specific section in your disclosures that states exactly what your penalty APR will be and when it will apply.

3. Keep track of your credit card statements

One way to avoid making a late payment is reading every single statement you receive and paying them immediately after you read them. Even better, make a list of credit card statements you should receive each month and check off each statement after it arrives.

Check the list regularly to make sure a statement doesn’t get lost in the mail or swiped by a criminal looking to steal your identity. If snail mail isn’t your style and your credit issuer offers the option, make sure to check your online statements regularly and set up an email reminder with the credit card issuer to email you your monthly statement.

Want to make life even easier?

Set up autopay for your card to make sure that you’re always paying on time.

4. Keep your credit card balances low

Charging more to your credit card results in higher minimum payments. Sometimes, those minimum payments creep up until you can no longer afford to make them, resulting in late payments.

Do your best to keep your credit card balances low. Only charging expenses that you can afford to pay off in full is one way to keep your balance in check.

5. Consider getting a credit card with no penalty APR

If you don’t want to worry about penalty APRs at all, there is an easy way to do just that. Only use credit cards that have no penalty APR. Believe it or not, they do exist.

At a glance: Cards with no penalty APRs

Not all cards have penalty APRs. Some don’t even charge late fees. Here are a couple of our favorites.

Citi Simplicity® Card

For those looking to escape penalty APRs, the Citi Simplicity® Card has no penalty rate, no late fees and no annual fee. Additionally, the card offers 0% introductory APR for 18 months on balance transfers and on purchases, with a variable APR of 14.74% - 24.74% afterward. Balance transfers must be completed within four months of account opening to get the introductory balance transfer APR. After the introductory period, the balance transfer fee is 3% (minimum $5), whichever is greater.

From our partner

Citi Simplicity® Card

From cardholders in the last year

Discover it® Cash Back

The Discover it® Cash Back card is a great card if you’re looking to avoid penalty APRs and earn credit card rewards at the same time.

The card has no penalty APR, a $0 annual fee and no late fee the first time you pay late. After that, the late payment fee is up to $40.

The Discover it® Cash Back card also offers 5% cash back on up to $1,500 in purchases in rotating categories each quarter that you activate and unlimited 1% cash back on all other purchases.


Bottom line

Sky-high penalty APRs (of up to 29.99%!) can devastate your finances.

Penalty APRs are usually incurred by making a credit card payment 60 or more days late. Late payments are an expensive mistake — not only could they result in a penalty APR, they could also hurt your credit and could cause late payment fees, too.

While any penalty APR imposed on the balance owed is required to go back to normal after six months of on-time payments, future purchases may be charged the penalty APR indefinitely.

Don’t want to worry about paying penalty APRs? You could always opt for a card that doesn’t have a penalty APR, or make sure you follow the rules listed in your credit card terms.


About the author: Lance Cothern is a freelance writer specializing in personal finance. His work has appeared on Business Insider, USA Today.com and his website, Mone… Read more.