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A penalty APR (annual percentage rate) is a high interest rate that can be triggered if you make your credit card payment late. When this happens, you may wind up paying more interest on future purchases. And, if you don't bring the account current within 60 days, the penalty APR may apply to your current balance as well.
How a Penalty APR Works
Credit cards have an APR for purchases, balances transfers and cash advances. Rates can either be variable and rise or fall based on Federal Reserve rates, or fixed. The rates you receive can also vary depending on the card and your creditworthiness—having good credit can help you get a lower APR.
A penalty APR is a rate that can be triggered when you don't pay your bill on time. It can be applied in the following ways:
- A penalty APR that's higher than your card's regular rate can be charged on future transactions if you don't make your minimum payment by the due date.
- Missing your payment by even one day could also lead to losing promotional interest rates, such as an introductory 0% APR.
- Once you're 60 days past due, the card issuer can apply the penalty APR to existing balances on your card.
There are, however, some strict limitations on when credit card companies can increase your card's APR, according to the Credit CARD Act of 2009:
- Your interest rate can't increase during your first year with the card except in certain circumstances, such as when you're 60 or more days late, a promotional rate ends or you have a variable rate and the benchmark rate increases.
- After the first year, a card issuer can increase your APR for any reason; however, it must send you a notice first (sometimes these appear on your regular card statement). The higher rate won't take effect for 45 days, and will only apply to transactions made 14 or more days after the notice was sent.
Additionally, when your interest rate increases or a penalty APR is applied, the increase might not be permanent.
How Long Does Credit Card Penalty APR Last?
If the card issuer increases your interest rate, it must review your account at least once every six months. If the underlying reason for a rate increase was resolved, then your card issuer should reinstate the original APR.
Penalty APRs are generally the result of missed payments. Therefore, if you want to get the penalty APR removed, you may have to make six consecutive on-time payments. Paying less than the full amount, or having a payment rejected (bouncing a check, for instance), will result in a missed payment.
If you never get back on track, the penalty APR could stay on your account indefinitely—although, if you completely stop making payments, the issuer will likely close your account.
How Is the Penalty APR Calculated?
Similar to how variable APRs on credit cards work, a penalty APR may be based on a fixed interest rate plus a benchmark rate. Combined, the penalty APR is often at or near 29.99% APR. Cards may also cap the penalty APR at 29.99%, even if a rise in the benchmark rate would otherwise lead to a higher APR.
The penalty APR will replace your standard APR, and your account will accrue interest in the same way as before but based on the new rate. Generally, card issuers will divide the APR by 360 or 365 to find your daily periodic rate, and then apply this rate to your daily balance to determine how much interest accrues.
How to Avoid Penalty APR Costs
Making at least your minimum payment on time will help you avoid a penalty APR. It's also how you should be using your credit card anyway, as late payments can lead to fees and lost benefits and hurt your credit even if you don't get hit with a penalty APR.
Another option may be to reach out to your credit card company and negotiate a different option before your payment is due. The company may offer you a hardship plan that allows you to temporarily miss payments or make a lower minimum payment without paying any extra fees or penalties.
Being mindful of when you use your credit card can also help you avoid a penalty APR in the future. Limiting the purchases you put on the card will lead to a lower balance and a lower minimum payment.
Should Finding a Card Without a Penalty APR Be a Priority?
While there are credit cards with and without penalty APRs, you should generally focus on other features, fees and benefits when trying to pick a new card. A penalty APR can lead to more interest expenses, but only if you don't make a minimum payment.
A penalty APR should also be a low concern relative to the other consequences of missing a credit card payment. Credit card late fees, for example, can cost $20 to $40 and likely outweigh your additional interest charges due to a penalty APR. And if you're worried about being consistently late on your payments, keep in mind that being over 30 days late could result in the card issuer reporting a late payment to the credit bureaus, which will hurt your credit.
A card that doesn't have an annual fee or has a low standard APR might save you money, making it easier to afford your payments. Even if a card does charge a penalty APR, making all your payments on time will prevent it from affecting you. If you want to compare cards' terms quickly and get matched with cards, you can use Experian's card comparison tool to review the current offers.