What Is A Penalty APR?

Jenn UnderwoodPersonal Finance Writer

Credit cards and banking specialist Jenn Underwood brings over 16 years of personal finance experience to the table. After a decade of teaching courses in banking, debt reduction, budgeting and credit improvement, she moved into writing content and fintech product development. Over the last four years, Jenn has contributed to Forbes Advisor and a variety of fintech companies. She has served as a UX consultant, moderated discussions on open banking and been a guest on a number of personal finance podcasts.

Jenn Underwood

Jenn UnderwoodPersonal Finance Writer

Personal Finance Writer

Caroline LupiniManaging Editor, Credit Cards & Travel Rewards

Caroline Lupini has been traveling the world with the help of credit card rewards since 2011. She has visited over 110 countries and is able to utilize her knowledge of credit cards and to make travel both less expensive and more luxurious. Caroline has over 50 credit cards in her wallet and has previously covered credit cards and travel for Business Insider, The Points Guy, USA Today, Lonely Planet, Orbitz and many others.

Fact Checked

Caroline Lupini

Caroline LupiniManaging Editor, Credit Cards & Travel Rewards

Managing Editor, Credit Cards & Travel Rewards

Fact Checked

Updated: Jun 22, 2023, 2:20pm

Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.

Getty

High credit card interest rates can make paying off a balance challenging under the best circumstances. Penalty APRs offer a whole new set of obstacles. Because this penalty is applied for a missed or returned payment, it can significantly increase the interest owed and make it much harder to pay down your debt.

Find the Best Balance Transfer Credit Cards Of 2024

Learn More

Quick Facts

A penalty APR can often be as high as 29.99%.
Late or returned payments can immediately cause a penalty APR on new purchases.
Penalty APRs apply to existing balances after two missed payments (60 days) and sufficient notice.
The penalty rate can apply indefinitely to future purchases.

Introduction

Every credit card has an annual percentage rate or APR. Your APR is the annual rate of interest charged on your card. Interest rates, especially credit card rates that compound daily, can be hard to calculate and can add up quickly if you carry a balance.

To complicate matters further, you likely have one APR for purchases and different, often higher rates for cash advances or balance transfers. Most credit cards offer a variable APR, an interest rate that changes over time based on the Prime Rate (which is set based on the Federal Reserve’s federal funds target rate). Credit cards may also offer you an introductory or promotional APR to encourage you to apply or incentivize you to start using your card again.

However, there is another APR you should know about—penalty APR. As the name implies, your credit card provider applies a higher annual percentage rate or APR as a penalty for being out of compliance with your payment agreement. Penalty APR can be close to 30% although depending on your credit card, it may be lower.

What Triggers a Penalty APR?

A penalty APR may be triggered if:

You do not make the minimum payment or make a late payment.
Your payment is returned due to insufficient funds or if your payment is rejected due to a closed account.
You exceed the credit limit on your card.
Any of the above conditions occur on another card or loan of any type provided by the same creditor.

Each credit provider has specific conditions for when a penalty APR applies, make sure to consult your credit card agreement.

How Does Penalty APR Work

After a Penalty APR Is Triggered

From the point of a missed payment or other triggering event, the creditor can apply the penalty APR on future transactions. The penalty rate applies to all additional purchases, balance transfers or cash advances made on the card as soon as the penalty is triggered.

Your credit card agreement includes the penalty APR and the events that cause this penalty. Your acceptance of the card terms serves as sufficient notice that a penalty APR will pertain to future transactions if any of the stated conditions occur.

Many credit cards indicate that the penalty APR may apply indefinitely on new purchases.

After Two Payments Are Missed

In order for the penalty APR to be applied to your current balance, you must be more than 60 days delinquent and receive notice from your credit card provider. It is important to note that notice can be included on your normal credit card statement and does not need to be a separate communication.

That notification must include the penalty APR, the reason for the increase and be sent 45 days before the increase is effective. The increase will apply to your existing balance, defined as the amount owed at the time the notice was sent.

If your new purchases were already accruing interest at the penalty APR, your creditor will no longer apply the penalty APR to purchases made prior to or within 14 days of the notice. However, the penalty APR will still apply to new transactions made after this period.

For First Year Card Holders

The CARD Act protects you from APR increases within the first year of holding the card without cause. However, delinquency of more than 60 days is excluded and a penalty APR can apply even within a cardholder’s first 12 months. Additionally, a penalty APR will supersede any introductory APR.

Be especially aware of this potential when taking advantage of an introductory balance transfer. If you are unable to make the minimum payments on the transfer, you may pay up to 29.99% on the entire remaining transfer balance.

The Cost of a Penalty APR

If you hold a balance of $3,000 on a card with a 14.99% APR and make a monthly payment of $90, you would pay approximately $904 in interest by the time you’re paid in full assuming no additional purchases are made. If a 29.99% penalty APR is applied to that same balance, you could pay $3,527 in interest making only the minimum payment.

The potential cost will likely be even higher. Depending on the event that triggered the penalty APR and your attempts to recover, you could have amassed two to three fees for late or returned payments. Late fees can range from $15 to $41 and returned payment fees can be as high as $40. Your penalty APR will also apply to any fees and new purchases placed on this credit card. Depending on how your payments are calculated, your monthly minimum payment could increase due to additional fees and the higher interest rate.

Even if you catch up on your late payment within the first two months, the costs could add up quickly. Depending on the timing of your billing cycle, you may owe the penalty APR on larger purchases you planned to pay off over time.

Being saddled with a penalty APR can also adversely impact your credit score. The late payments will affect the largest percentage category of the FICO scoring model, payment history. Returned payments have the same effect on payment history as a late payment. And being over your credit limit will decrease your debt to available credit ratio.

How To Remedy a Penalty APR

The initial penalty APR notice must also state that the normal APR will be restored in six months if the creditor receives timely minimum payments during this period. If these conditions are met, your lender can no longer charge the penalty APR on any remainder of your existing balance. However, many credit cards may still impose the penalty APR on future purchases.

Additionally, the six months of payment must occur consecutively. Missing a payment or providing a late payment during the reconciliation period, could reset the clock and further extend the penalty.

Pay More Than the Minimum

If you are trying to pay down a balance with a large interest, any amount paid above the minimum payment must be applied to the highest interest rate first. Even if you can find an extra $5 a month, it can make a tremendous impact. Using the example above with a penalty rate of 29.99%, if you paid an additional $5 each month, you could save $536 in interest and pay off the balance a full nine months sooner.

Avoid New Purchases

If possible, stop using this credit card and any cards offered through the same provider, as they may also be charged a penalty APR. Even if you are making regular, timely payments, your creditor is likely to impose the penalty APR on any new transactions.

If you have another credit card, use that card and stay on top of those payments or make cash purchases when possible. If your credit card agreement indicates that the penalty APR may apply indefinitely, you may want to stop using this card altogether and consider other alternatives. Note that closing the account will reduce your available credit and may adversely affect your credit score.

How To Avoid a Penalty APR

Make sure you pay at least the minimum payment on time each month.
Consider setting up automatic bill pay to avoid missing a payment.
Ensure you have sufficient funds available before your payment posts.
Contact your credit card provider and ask that over-the-limit transactions not be allowed on your card. Your transaction may be declined if a purchase would place you over your card limit, but penalties will not apply.

Bottom Line

A penalty APR can be wildly costly and challenging to entirely remove from your credit card. Do your best to stay on top of payments and communicate proactively with lenders before missing a payment.

If you find yourself with a penalty APR, reduce or stop spending on that card and work to restore timely minimum payments. You may also want to seek out an approved credit counselor for more individualized support.