What Is a Penalty APR and How to Avoid It?
Understand penalty APR: what it is, how it impacts your credit, and clear ways to prevent or recover from this increased interest rate.
A credit card’s Annual Percentage Rate (APR) represents the yearly cost of borrowing money, applied to any outstanding balance. A penalty APR is a significantly higher interest rate applied to a credit card account under specific circumstances. It serves as a consequence for violating the terms of the credit card agreement, making it important for cardholders to understand its implications.
What Penalty APR Means
A penalty APR is an elevated interest rate that credit card issuers can apply to a cardholder’s account. This rate replaces the standard APR and is typically much higher, often reaching up to 29.99%. Its purpose is to offset the increased risk associated with a cardholder who has breached the card agreement.
This higher rate can apply to both existing balances and any new purchases made after the penalty APR is triggered. The specific penalty APR is usually a predetermined rate or a range of rates disclosed in the card’s terms and conditions, often within the Schumer box. Unlike late fees, which are a fixed dollar amount, a penalty APR is a percentage that continuously accrues interest on the outstanding balance, making it a potentially much more costly consequence over time.
Actions That Trigger Penalty APR
Credit card issuers implement a penalty APR when specific actions violate the terms outlined in the credit card agreement. The most common trigger is making a payment that is 60 or more days late. Federal law often requires issuers to provide cardholders with a 45-day notice before a rate increase takes effect, meaning the penalty APR might not appear on an account until approximately 105 days after a payment was initially due.
Other actions that can trigger a penalty APR include a payment being returned due to insufficient funds or a closed account. Exceeding the credit limit on the card can also lead to the application of a penalty APR, depending on the card issuer’s policies. These triggers are generally detailed in the cardholder agreement.
Reverting from Penalty APR
Once a penalty APR is applied, it does not necessarily remain on an account indefinitely. Federal law generally requires credit card issuers to review the account after a period, typically six months, if the cardholder has made consecutive on-time payments. If a cardholder demonstrates consistent, timely payments during this review period, the issuer may revert the interest rate on the outstanding balance back to the original or a lower standard APR.
While the rate on existing balances may revert, some issuers may choose to keep the penalty APR for new purchases even after the six-month period of good behavior. To facilitate the reversion process, consumers should make at least the minimum payment on time each billing cycle and avoid exceeding their credit limit. Contacting the credit card issuer directly to understand their specific policies for reinstatement and to inquire about any available hardship programs can also be a helpful step.