What Is a Penalty APR? How to Avoid the Punitive Interest Rate

Penalty is such an unfriendly word. It derives from the Latin word for “punishment” or “pain.” Penalties are no walk on the beach, but they are so much worse when self-inflicted.

That’s exactly what a penalty APR is — self-inflicted punishment for missing a credit card payment. 

It’s a higher rate of interest that your credit card issuer can impose should you break the terms of your credit agreement (i.e., late payments, missed payments, or exceeding your credit limit).

The penalty APR is generally much higher than the regular APR and can increase your debt quickly if activated.

In this article, I will dissect the most common penalty APR triggers, how much it could cost you, and how to avoid it. I hope to instill a healthy fear of the penalty APR and convince you to avoid incurring expensive interest rates.

Many, but not all, credit cards can impose a penalty APR when you’ve broken the rules. Let’s dive into the common reasons your rate may go up due to a penalty APR.

Making Late Payments Puts You at Risk

Let’s be clear: Anyone can make a mistake and forget to pay a credit card bill on time. The problem with penalty APRs is that they are so unforgiving — one strike and you’re out. 

To no one’s surprise, a late or past-due payment is one that you didn’t make on time. Let me explain what that really means and how the credit card issuer gives you plenty of chances to avoid this faux pas.

Your monthly statement lists the date the payment is due. Paying even a day after this date is considered late. The card issuer may assess a penalty APR only after a grace period expires — typically between 21 and 25 days. 

The grace period is the duration from the statement date until the payment is due.

Grace periods are provided on almost all credit cards. You are not penalized for at least paying the minimum amount owed within this time, but late payments are an immediate misdemeanor. 

Almost all credit card companies charge a late fee for missing the due date. Those fees will continue to accumulate if you miss more payments. If you’re 30 days late, the card issuer will report you to at least one credit bureau, which will add a black mark to your credit report. 

Payment history is a crucial factor in your credit report, and a late payment will almost certainly lower your credit score. Numerous late payments will reduce the likelihood of getting loans or credit in the future, which is not something you want.

Missing Payments Can Lead to Harsh Penalties

Missed payments have harsh repercussions, beginning with a late fee. You must make at least a minimum payment for your bill before the due date. Make sure to distinguish a missed payment from a late one. 

When your payment is late, it arrives after the due date, whereas a missed payment isn’t sent at all.

As I mentioned, not all credit cards have a penalty APR, but if yours does, a missed payment will set it into effect. This means your unpaid balance will accrue interest more quickly. 

If you can make the payment within 30 days of the due date, you can prevent damage to your credit score. Otherwise, the negative information will stay in your credit report for seven years. 

If you keep missing payments, the credit card company will probably close your account and sic the debt collector on you. That will also go on to your credit report and further screw up your score.

Exceeding Your Credit Limit Can Cost You

This issuer may impose a penalty APR if you exceed the card’s limit, which is the maximum you can charge on the card. 

A credit card limit is the maximum amount you can charge to your credit card. 

Some card issuers may approve purchases exceeding your limit, but this is usually reserved for customers with good credit. Other issuers will deny all charges that exceed your limit.

Even if your issuer allows credit limit overruns, it may still consider you a higher risk and activate the APR to protect itself. That, along with any over-limit fees, is a good reason to be cautious when your balance nears your credit limit.

These over-limit fees can accumulate quickly, adding to your financial woes. You may also find that your credit score is hurt due to the high credit utilization, as it is a significant factor in determining your credit score. 

High credit utilization occurs when your unpaid balance exceeds 30% of your credit limit.

High credit utilization suggests that you rely too heavily on credit, which is a red flag for potential lenders. 

Your credit card company can also lower your credit limit if you consistently exceed it, so you have less spending power. Even if you keep your balance within the limit, a continually high CUR may cause the card issuer to cut your credit line. 

The penalty APR can be harsh on your wallet. It raises the interest rate that applies to your credit card, making it more expensive to carry a balance. This penalty APR can balloon your debt and be very difficult to remove. 

Your Interest Rate May Double Overnight

A standard APR is the interest rate routinely charged to your credit card balance. A penalty APR is usually quite a bit higher — often about 29.99%. So, if you pay 15% interest, a penalty APR nearly doubles the cost of borrowing money on your card. This can quickly make it harder to manage debt because higher interest rates mean you pay more monthly interest charges on unpaid balances.

Say you owe $1,000 at a 15% standard APR. You’d pay an interest payment of around $12.50 per month. With a 29.99% penalty APR, that balance would cost you around $25. 

This vicious cycle can quickly cause your debt to spiral out of control. The higher your interest, the more you owe. If you’re already having trouble making payments, a penalty APR can put you even deeper into the hole.

You’ll Have More Debt and Fewer Borrowing Opportunities

You will pay more interest on your existing balance if your APR increases to the penalty level. In other words, more of what you’re paying goes to interest rather than reducing the principal. This can increase your total debt by a considerable amount. 

In extreme circumstances, you could enter a cycle where your debt grows faster than you can pay it off. That’s when it’s time to call a bankruptcy lawyer.

Missing payments and holding a lot of debt will decrease your credit score. A lower credit score makes getting approved for new credit cards or loans harder. Even if you do get approved, you may face higher interest rates. 

This limits your borrowing opportunities and makes financial recovery a sticky wicket. A bad credit report can even affect other aspects of your life, such as renting an apartment or getting a job.

Reverting to the Standard APR Is Difficult

Reverting to a standard APR after a card has applied the penalty does not come easy. You must prove to the issuer that you are indeed a dependable cardholder. In most cases, this means several months or years of on-time payments. 

Only then might your credit card issuer reduce your APR back to normal. It’s a slow process that requires consistently good behavior, and issuers are under no obligation to reinstate regular APR.

The CARD Act requires issuers to re-examine credit card accounts after six months of consistent on-time payments. The issuer must consider reducing your APR if you have met the requirements. “Consider” is the keyword. From everything I’ve seen, I’d advise you not to hold out too much hope of a reprieve. Let’s face it, credit card issuers have no sense of humor.

Seriously, you’ve got to avoid these penalties by practicing good credit use. You must keep making timely payments and not exceed your credit limit. Remaining informed about your credit card terms can save you from future penalties.

The penalty APR can be destructive to your credit score and your budget. However, you can avoid these costly penalties through straightforward practices such as making timely payments and monitoring your credit limit. 

Make Payments On Time, Every Time

You can use a few strategies to help you make payments on time, such as setting a calendar reminder or paying off debts when you get your paycheck.

Setting up automatic payments helps you avoid missing any due dates, as the money is automatically taken from your checking account. This should give you greater peace of mind and help you avoid late fees and penalty APRs. Getting reminders on your phone or email alerting you before a payment is due can also help. 

Closely Monitor Your Credit Limits

Keeping a close eye on your spending is essential. Knowing how much credit you have left can help you stay within the limit and avoid over-limit fees. 

Monitoring your regular credit card statements should help you balance your budget, which can assist you in managing your finances. But statements are monthly — you need real-time information to avoid going over your credit limit.

Several tools can help you manage your credit limits effectively. For example, you can use a mobile app from your credit card issuer to monitor real-time spending. Usually, you can configure these applications to alert you once you are nearing the credit limit. 

In addition, they have an option where you can set the maximum amount you want to spend within a specific period to ensure that you are within budget. These resources can save you from penalty APRs and assist you in managing credit prudently. Why wouldn’t you use them?

Understand Your Credit Card’s Terms

Understanding the terms and conditions of your credit card is Job Number One. The key terms to remember include interest rate, grace period, and fees for late payments or exceeding credit limits. 

It’s wise to read the fine print and watch for changes in your card terms. Knowledge is power when using your credit card. Here are the most important terms you should know related to penalty APRs:

• Annual Percentage Rate (APR): The yearly interest rate charged on borrowed money is expressed as a percentage.
• Balance Transfer: Transferring the debt owed from one credit card to another, typically to one with a lower interest rate. 
• Billing Cycle: The period between billing statements, usually 30 days.
• Cash Advance: Borrowing cash against your credit card limit. Usually done at a higher interest rate than regular purchases.
• Credit Agreement: The contract between the borrower and the credit card issuer contains terms and conditions about the credit account.
• Credit Limit: The maximum amount that can be borrowed with a credit card
• Credit Score: A number that assesses the level of creditworthiness based on credit history.
• Delinquency: Your status when you don’t pay or settle a debt or loan, such as a credit card bill.
• Default: Failure to meet a debt’s legal obligations or conditions, such as making timely payments.
• Default Rate: Another term for the penalty APR. Indicates the higher interest rate applied when you default on your credit agreement.
• Grace Period: The period during which you can pay your credit card bill without incurring interest charges between the statement date and the due date.
• Interest Rate: The cost of borrowing money. Usually a percentage of the amount borrowed.
• Late Payment Fee: The credit card issuer charges a fee when a payment is made after the due date.
• Minimum Payment: The smallest amount you must pay by the due date to keep your account in good standing.
• Penalty APR: A higher interest rate that may be applied to your credit card account if you miss payments or violate other credit agreement terms.

Your credit card agreement discusses all the terms that apply when you use your card, including when and why you may incur a penalty APR. Understanding the details is your most reliable way to avoid messing up your credit card account.

Download a copy of the credit card agreement and take the time to review it occasionally. It’s easier to avoid expensive penalties and manage your credit wisely if you understand the rules.

The increased rate from a penalty APR will generally make it more expensive to pay down debt. However, I don’t want you to give up hope, as there are things you can do to recover and lower that rate again. Here are four key steps you should follow to get back on track. 

Each requires a certain level of commitment, but they will help you manage your finances better. 

1. Address the Underlying Reason for the Penalty APR

Understand exactly why you were charged the penalty APR. Was it a result of a late payment, or did you exceed the credit limit on your card? Knowing what caused the penalty can help you avoid repeating the same problem. 

Review the events that caused you to trip the penalty APR trigger. Do you notice any consistent issues that may have led to being penalized? If possible, devise a plan to remedy the situation — for example, set up automatic reminders of when to pay bills. 

Once you understand why you triggered a penalty APR, learn how to identify those issues earlier in the future.

If you need help controlling your spending, consider revising your budget to ensure that the money available every month will be sufficient for the required payments. More importantly, don’t ignore your budget – it’s only as effective as you are attentive!

2. Communicate With the Issuer

Next, contact your credit card issuer and explain why you missed a payment or were in violation. Be honest, demonstrate remorse, and show that you are trying to resolve the problem.

Look, It can’t hurt to ask the issuer to reinstate your normal APR. It’s a long shot, but sometimes issuers will oblige if your record was clean until the infraction occurred.

Issuers want to help their customers. Even though they might not rescind your penalty APR immediately, keeping the lines of communication open doesn’t hurt.

It helps to commit to making timely payments and keeping the lines of communication open. Call your issuer regularly for updates on your progress. Your issuer may offer extra solutions or advice. 

3. Always Make On-Time Payments 

Always pay all your bills on time. This indicates to the credit card issuer that you are taking responsibility and are serious about improving your score. 

Also, auto payments should be set up where possible to avoid missing payment dates. Know your due dates and plan your budget around them. Making on-time payments is crucial to demonstrating your reliability. 

Make a plan to pay your credit card bills on time, every time. That can include setting up automatic payments.

Many issuers review accounts after six months, and some may remove penalty APRs. In the meantime, work on increasing your credit score by making consistent, on-time payments and keeping your credit utilization ratio below 30%.

4. Consider a Balance Transfer Card

I advise you to get a balance transfer card if you trigger the penalty APR on your current card. A balance transfer card gives new card members an introductory 0% APR on balance transfers for six to 18 months after card opening.

By moving your existing card balance to the new card, you avoid paying a higher APR on your balance. Your task, then, is to pay down your balance before the promotional period ends. You may be tempted to close your old account, but that could hurt your credit score. It is better to leave it open if it has a low or no annual fee.

Each balance transfer will incur a transaction fee, typically 3% to 5%. That’s a lot less than a 29.9% penalty APR. Assuming you can qualify for a balance transfer card, I’d say this move is pretty close to a no-brainer. Another no-brainer: Make sure your next credit card doesn’t have a penalty APR. 

These steps should help you recover from a penalty APR and get your credit situation back under control. Stay focused on managing your finances, and I’m confident you will see positive results. 

Trust me, you should avoid Penalty APRs at all costs. No one wants to spend more of their hard-earned money on avoidable interest fees. However, the only way to avoid this is by paying your credit card bills on time and staying within your credit limits. 

I’ve found that the credit cards most likely to impose penalty APRs are meant for consumers with bad or fair credit, which is all the more reason to build your credit score. I hope I have convinced you that avoiding penalty APRs is worthwhile.