What is penalty APR and how do you avoid it?

You’re probably familiar with credit card annual percentage rates (APRs) as the figure that determines the interest charged on purchases and other card activity like balance transfers and cash advances. A penalty APR, however, is a bit different than the others. It’s a significantly higher “punishment” APR that kicks in if you fail to pay your bill on time, have a payment returned for insufficient funds or otherwise violate your card’s terms.

Penalty APRs are expensive and may take months to revert to the original rates. Fortunately, there are ways to avoid them in the first place. This guide will tell you everything you need to know about penalty APRs so that you can keep them from triggering on your account.

How do penalty APRs work?

A credit card issuer can apply a penalty APR when you make late payments, your payment is returned because of insufficient funds or a closed account, or you exceed your credit limit. That penalty APR will replace your regular APR and will likely be much higher than your existing interest rate.

The good news is that credit card issuers can’t charge a penalty APR arbitrarily. With credit card APRs, it’s important to remember the numbers 21, 45 and 60:

• 21. By law, issuers must give you at least 21 days from when your statement is generated at the end of a billing cycle to your payment due date. In most cases, that stretch is also an interest-free grace period, but that isn’t mandated by law.
• 45. Federal law requires the issuer to give you 45 days’ notice before applying a penalty APR. The notice should include the penalty rate and the reason for the penalty.
• 60. The penalty APR generally comes into play only after you’ve failed to make a payment for at least 60 days.

Each credit card issuer outlines the specific conditions triggering a penalty APR in your credit card’s terms and conditions document. Look for the details as part of the document’s Schumer box.

How long does a penalty APR last?

The penalty APR could last as little as six months. Federal law requires your credit card issuer to review your account once you’ve made six consecutive on-time monthly payments. The easiest way to return to your standard APR is to address the underlying reasons behind the penalty APR.

Actions that can influence your issuer to reinstate your standard APR include paying off the minimum balance, making on-time payments and staying within your credit card’s limit. Conversely, If you continue to engage in negative behaviors, the penalty APR could remain indefinitely.

Consequences of a penalty APR

The obvious consequence of a penalty APR being applied is the higher — potentially much higher — amount of interest you could accrue. Triggering the penalty APR means you have a balance and you’ve failed to make at least the minimum payment on time and you are likely already accruing interest on that balance.

Once the penalty APR is applied, you’ll be paying even more. A Bankrate survey in November 2023 revealed that 49 percent of credit cardholders carry revolving debt, so you certainly aren’t alone if you’re among this group. If you do find yourself in this situation, continuing to make at least the minimum payments on time each billing cycle will allow you to avoid triggering the penalty APR that could send your debt even higher.

Does triggering a penalty APR affect your credit?

No, a penalty APR won’t directly impact your credit score. The factors leading to the penalty APR, however, certainly can adversely affect your credit. Under the FICO scoring model, repeated late payments impact the payment history category. Payment history — including that of credit card accounts — makes up 35 percent of your score, and a record of making late payments can weaken that pillar.

Payments returned due to closed accounts and insufficient funds can also influence your payment history — especially if you fail to resolve the issue in a timely manner.

Lastly, depending on your other available credit, exceeding your credit limit on a card could result in a high credit utilization ratio, which accounts for 30 percent of your FICO score.

How is the penalty APR calculated?

The penalty APR is usually a predetermined rate you can find in a card’s terms and conditions. Factors like your credit card balance and your credit score don’t typically determine the penalty APR.

Most credit card issuers limit their penalty APRs, but the limit is often a whopping 29.99 percent. That rate is substantially higher than the average credit card APR, which is around 20 percent, and almost certainly a lot higher than your standard APR.

Keep in mind that even if you avoid the penalty rate, late payments can still cost you in other ways. Unless you’re in the midst of a promotional 0 percent APR period, you’ll pay interest on your outstanding balance. If you are taking advantage of a 0 percent period when you miss a payment or otherwise trigger a penalty APR, the card issuer could revoke that promotional rate.

You may also be on the hook for late payment or other fees.

What to do if you’re being charged a penalty APR

Here are some measures you can take to lessen your debt if you’re currently subject to a penalty APR:

• Call the issuer. Be proactive and explain the backstory on missed payments or whatever triggered the penalty APR. This isn’t a guarantee that the penalty APR will be reduced, but it doesn’t hurt to present your side.
• Check your credit card agreement. Be sure to understand how your credit card issuer deals with late payments and how the penalty APR applies to your balances.
• Limit using this credit card and pay off balances as soon as possible. If you’re not able to reverse the penalty APR, you’ll want to keep your balance as low as possible. Make it a priority to pay off that balance as soon as you can. Bankrate’s credit card payoff calculator can help you come up with a repayment plan.
• Get organized. To break the cycle of late or missed payments, check your balances frequently and set reminders for payment dates. Better yet, set up automatic payments of at least the minimum amount due.
• Consider applying for a balance transfer credit card if you can’t pay off the balance. Look for a balance transfer credit card to lessen the burden of carrying debt subject to a penalty APR.

How to avoid a penalty APR

Good financial habits are the key to avoiding penalty rates and many other fees. Here are a few habits and tips to consider:

1. Don’t carry a balance. The best way to avoid a penalty APR is simple: Pay your monthly credit card bill in full and on time. If nothing else, avoid the penalty APR by making a minimum monthly payment by the due date each billing cycle.
2. Consider automatic payments. Many credit card issuers offer the option of automatic payments so you can set a date and put your payments on autopilot. The payments draw from your bank account, and you can choose to make a full or minimum payment (although we recommend a full payment if possible). Just remember to ensure there’s enough in your bank account to cover the payment amount since insufficient funds are another trigger for penalty APRs.
3. Set reminders. If you’d rather not use automatic payments, set reminders for yourself. You can do it yourself by setting up calendar reminders on your phone or computer, or you can set text or email reminders through your issuer. You can also take the old-school approach with a circled date on a calendar or a sticky note on your monitor.
4. Choose a card without a penalty APR. As a safeguard, you might want to consider a credit card that doesn’t charge a penalty APR, some of which are listed below. Although some no-penalty-APR cards are comparable to other options, the potential trade-offs could include lower credit limits or fewer rewards.

Best credit cards with no penalty APR

Not all credit cards impose penalty APRs. Here are some of the best credit cards available with no penalty APR:

The bottom line

A penalty APR isn’t inevitable. Make your credit card payments on time each month to not only avoid a penalty APR, but also to avoid late fees and possible damage to your credit score.

If you’re worried about the possibility of triggering a penalty APR, consider a credit card that doesn’t impose a penalty rate. Although you’ll still be responsible for fees and interest charges, your APR won’t increase as a result of your account activity.

Issuer-required disclosure

*The information about the BankAmericard® credit card has been collected independently by Bankrate.com and was last updated on March 12, 2024. The card details have not been reviewed or approved by the issuer.