What is a penalty APR?

The annual percentage rate (APR) on your credit card determines how much interest you’ll be charged if you carry a balance. A penalty APR is a higher-than-normal APR that’s applied if you violate your credit card’s terms by doing things like missing payments. 

The good news is that you can avoid penalty APRs by understanding your card agreement and using your credit card responsibly.

What you’ll learn:

• Your credit card issuer could increase your APR for violating the card’s terms and conditions.

• Exceeding your credit limit or making late payments are two actions that could result in a penalty APR.

• Using your credit card responsibly can help you avoid penalty APRs.

Credit card issuers may charge a penalty APR following missed payments or another card term violation. The new penalty APR takes the place of the original purchase APR for a specific amount of time and could be higher than the standard rate. 

Not every card has a penalty APR, and there’s no standard penalty rate. You can find information about your card’s APR in the Schumer box in your card’s terms and conditions.

One thing to keep in mind: Federal law requires credit card issuers to provide 45 days’ notice before increasing your interest rate. And that notice will list the penalty APR and explain the reason for the change.

Here are some examples of actions that may result in a penalty APR:

• Making late payments

• Failing to make minimum payments

• Having payments returned due to a closed account or low funds

• Exceeding your credit card’s limit

While some credit cards don’t have penalty APRs, others do. And that penalty rate can vary greatly, depending on the card. But typically, a card’s penalty APR is a set rate, as opposed to one based on factors like your credit score. ​​​​​​

After on-time payments are made for six months with a penalty APR, credit card issuers are required to review accounts. At that time, the APR may revert to the standard rate. But continued violations of card terms could result in the penalty APR staying in place longer.

You can avoid a penalty APR by understanding your credit card’s terms and using your card responsibly. Here are some tips:

• Make on-time payments each month. Note the due date for your monthly payments. Consider setting reminders or enrolling in automatic payments to avoid missed payments. 

• Make at least the minimum payment. Paying less than the minimum amount due can still be considered a late payment. If you go further and pay your bill in full and on time, it can help you avoid paying interest altogether.

If your credit card issuer has already charged a penalty APR, here are some options to consider:

• Get current on your payment and watch your spending. If you’re still using your card, remember you can avoid interest charges on new purchases by paying off your statement each month. 

• Use credit responsibly. After identifying the cause of the penalty APR, consider ways to avoid repeating the issue, such as setting reminders to regularly check your balance and make payments.

• Consider a balance transfer credit card. If you’re worried about being able to get back on track due to a high balance and minimum payment, a balance transfer credit card may be another option. It won’t eliminate the debt and may come with balance transfer fees, but it might be part of a strategy to pay down credit card debt.

Not all credit cards have a penalty APR, but for ones that do, rates and terms vary by card. 

Fortunately, making on-time payments every month and staying below your credit limit can help prevent penalty APRs. When you’re comparing credit cards, it’s a good idea to review the terms and conditions so you’re familiar with the consequences of late or missed payments. ​​​​​​