When Does a Penalty APR Go Into Effect?

Understanding Penalty APR

A penalty Annual Percentage Rate (APR) represents a significantly higher interest rate that credit card issuers may apply to an outstanding balance. This elevated rate serves as a consequence for specific actions or behaviors that violate the terms of a credit card agreement. It is substantially more costly than a card’s standard interest rate, directly impacting the interest accrued on balances.

Understanding Penalty APR Triggers

Credit card issuers implement a penalty APR when certain events or actions indicate a higher risk from the cardholder. The most frequent trigger for a penalty APR is a late payment, which often occurs when a payment is 60 or more days past its due date.

Another common trigger is exceeding the assigned credit limit. If a cardholder surpasses their credit limit, the issuer may apply a penalty APR. Payments that are returned unpaid, such as those due to insufficient funds, also frequently lead to a penalty APR.

The Effective Date of Penalty APR Application

Federal regulations require credit card issuers to provide advance notice before a penalty APR takes effect. Cardholders must receive a written notice at least 45 days before the increased rate is applied to their account. This notice clearly outlines the new penalty rate and the specific reason for the change in terms. This mandatory waiting period ensures cardholders are informed of the impending rate adjustment.

The penalty APR typically applies only to new purchases and cash advances made after the effective date specified in the notice. Existing balances carried on the card before the 45-day notice period generally retain their original, lower APR. However, an important exception exists for promotional rates, such as 0% introductory APR offers. If a trigger event occurs, these promotional rates can be immediately revoked, and the penalty APR may then apply to the existing balance that was previously under the promotional terms. Consequently, if a payment is 60 days late, the 45-day notice follows, meaning the penalty APR could become active approximately 105 days after the original payment due date.

Reverting from a Penalty APR

Cardholders who have incurred a penalty APR can often work towards having their standard interest rate reinstated. Federal law, specifically the CARD Act of 2009, requires credit card issuers to review accounts with a penalty APR after the cardholder has made six consecutive months of on-time payments. The primary condition for reverting to the original APR is consistently making at least the minimum required payment on time for this six-month period.

If these conditions are met, the issuer is generally required to restore the original, lower APR on the account within a reasonable timeframe. While the penalty APR on existing balances may be removed, some issuers retain the right to apply the higher penalty rate to future purchases, even after the six-month review period. Cardholders may also attempt to negotiate with their issuer, particularly if they have a history of responsible payments, though such a request is not guaranteed to result in a change.