You’re probably most familiar with your credit card’s annual percentage rate (APR), because that’s the interest charged on purchases and other transactions. Penalty APR is a higher-than-normal rate for violating the card’s terms of service — for example, if you don’t pay your monthly bill on time. It’s costly, damages your credit score, and often takes months to resolve. Fortunately, there are ways to avoid this.
What is Penalty APR?
Before discussing APR, it’s important to understand the basics of credit card APR.
Every credit card has an APR or APR. This is the interest rate you’re willing to pay on what you pay with the card. Each month, you must pay at least the minimum balance by the due date, but you can pay more than the minimum at any time. If you do not pay your bill in full, the credit card issuer will charge interest on any unpaid balance at the APR specified in the cardholder agreement.
Depending on your agreement with the cardholder, you may be charged a different APR depending on how you use the card. Common types of credit card APRs include Purchase APRs, Balance Transfer APRs, and Cash Advance APRs.
“Penalty rates are the rate hikes that result from violating the terms of your credit card agreement,” says Michael Sullivan, a personal financial advisor with Take Charge America, a nonprofit that provides credit counseling and debt management services.
According to Sullivan, you may be charged APR if your credit card payments are delayed by more than 60 days, or by more than a few days per month. Penalty rates are usually temporary unless accounts continue to violate terms, he added.
Regardless of the normal rate, the standard rate APR appears to be 29.99 percent, but some cards have lower or no penalty rates, Sullivan said. In comparison, typical credit card APRs range from 14% to 24%. Credit card companies can retroactively charge penalty interest on existing balances, but advance notice must be given.
Please refer to the terms and conditions of the cardholder agreement you received when you first opened the card for the APR of your credit card. You can also call your credit card company and ask for APR details.
How APR works
Penalty interest is triggered when you pay late, your payment is refunded due to insufficient funds or the account is closed, or you exceed your credit limit. Each credit card issuer has specific conditions that must be met for the effective penalty rate to be in effect. When a penalty APR is triggered, your default APR rate will be replaced by the penalty APR, which can be much higher.
The good news is that credit card issuers can’t impose penalty interest at will. For credit card APRs, it’s important to remember the numbers 21, 45, and 60:
- 21. You have a grace period of 21 days (from the end of your billing cycle) before your card’s default APR is applied to your outstanding balance.
- 45. Federal law requires issuers to give you 45 days’ notice before imposing penalty interest.
- 60. APR penalties generally come into effect when the outstanding balance is not paid in full for more than 60 days.
Read the terms and conditions of your credit card to find out when you might be charged the APR and what the higher interest rate is. Do the same with all new cards before applying.
How long does the fine APR last?
If you really want to cash out your balance, the penalty APR can last as little as six months. Federal law requires your credit card issuer to verify your account after you make six consecutive on-time payments. The easiest way to go back to standard APR is to address the root cause behind the punitive APR.
There are a few factors that will determine if your default APR will be reinstated, such as: B. Pay the minimum balance, make no late payments and respect your credit card limits. However, penalty interest may remain indefinitely if you continue to use your outstanding balance.