If you’re a day late on your credit card payment, you may be faced with a late fee and a little embarrassment. But if you’ve skipped two payments in a row, your credit card issuer…
If you’re a day late on your credit card payment, you may be faced with a late fee and a little embarrassment. But if you’ve skipped two payments in a row, your credit card issuer could impose a penalty APR, which is typically much higher than your regular purchase APR.
Accumulating more interest with a penalty APR can make it more difficult to get caught up when you’re already behind. It’s essential to understand how penalty APRs work, how they affect you and what you can do to avoid them.
What Is a Penalty APR?
A penalty APR is an increased annual percentage rate that issuers may charge when cardholders are late on payments. A typical penalty APR is 29.99 percent, but it may be lower on some credit cards. Federally chartered credit union cards, for instance, cap their APRs at 18 percent. Some cards don’t charge a penalty APR at all.
For consumer credit card holders, an issuer can assess a penalty APR if you’re 60 days late on a payment and the issuer has sent you a written notice 45 days before the rate increase. The terms were implemented by the Credit CARD Act of 2009, which puts limits on penalty fees and charges.
“A penalty APR really hits consumers who are struggling with their payments, and those are the people who are most likely to have trouble digging out from under the debt,” says Gerri Detweiler, education director for Nav, which helps business owners build and monitor their business credit.
Penalty APRs aren’t permanent, at least not for consumer credit cards. If you’ve triggered a penalty APR, the card issuer is required to review your account at least once every six months to determine whether it can lower your APR. If you continue to miss payments, the penalty APR could remain, but if you’re making payments on time, you may go back to your old APR or get a reduction from the penalty APR.
Penalty APRs on Small Business Credit Cards
Business credit card holders aren’t protected under the Credit CARD Act, so credit card issuers aren’t bound by standardized terms. If you have a business credit card, you may trigger a penalty APR sooner, be subject to a higher rate or be stuck with a longer penalty period.
Some business credit cards assess a penalty APR if you miss just one payment or if one of your payments is returned. What’s more, the penalty APR could remain on your account indefinitely.
Other business credit cards may charge a penalty APR if you make two late payments within a 12-month period. Your APR may return to your regular purchase APR after you’ve made 12 consecutive on-time payments. While these terms are a bit more generous, they still don’t come close to the standards for consumer credit cards.
How Much Can a Penalty APR Cost You?
There’s no single answer for how a penalty APR will affect you because it depends on your balance, your card’s purchase APR and the new penalty APR. However, the difference can cost you hundreds in a short period of time.
For example, say you have a $4,000 balance on a credit card with a 17.99 percent APR, but you’ve triggered a 29.99 percent penalty APR. If you pay off the balance in six months, it’ll cost about $145 more under the new interest rate. The higher your balance, the higher the cost of a larger interest rate.
Meanwhile, if you can’t keep up with your payments, you could trigger late fees and extend your penalty APR period.
Awareness of your card’s terms is key to avoiding penalties. “Make sure you know the ins and outs of your credit card,” says Aaron Aggerwal, assistant vice president of credit card lending at Navy Federal Credit Union. “Your credit card agreement is the key to fully understanding your card and any fees or penalties that may occur and when they’ll apply.”
The easiest way to prevent triggering a penalty APR is to pay at least the minimum amount due each month. Aggerwal suggests creating reminders to assure you make payments on time.
You can also set up automatic payments to cover the full balance so you don’t have to worry about paying interest at all. But if you’re not sure you’ll always have enough cash in your checking account to cover the full payment, set up autopay for at least the minimum amount due.
“The reality is we get busy and sometimes we just forget or life intervenes,” says Detweiler. “… Setting up automatic minimum payments can be an excellent way to protect yourself.”
Keep in mind, though, that even if you have a card with no penalty APR, your card may still charge a late fee if you miss a payment, and regular interest will still apply to your balance. Also, if you’re more than 30 days late on a payment, it could damage your credit.
What to Do if Your APR Has Been Increased
If your credit card issuer has tacked a penalty APR onto your account, you have a few options:
Talk with the card issuer. Depending on the circumstances that led to your penalty APR, you may be able to call and plead your case. There’s no guarantee that it will reduce your APR, but it won’t hurt to give it a try.
The issuer may just tell you to make the next six monthly payments on time and your APR will go back down, says Detweiler.
Pay off the card and wait out the term. If your balance is relatively low, work on paying it off as quickly as possible to reduce the balance subject to the higher interest rate. You also should avoid making new charges. Consider using a different credit card or another payment method through the remainder of the penalty APR period.
Transfer your balance. If you have another credit card with a lower APR or can qualify for a balance transfer credit card with a zero percent introductory APR promotion, consider moving your balance to avoid paying the penalty APR.
Most credit cards charge a balance transfer fee of 3 to 5 percent, so do the math to make sure that you’ll save money on the transaction. Some credit cards don’t charge a balance transfer fee or waive the fee if you make the transfer within an introductory period, such as 60 days of opening the account.
However, obtaining a credit card with a good balance transfer offer may not be easy after you’ve triggered a penalty APR. “If you’re late by 60 days and your credit report reflects that, other card issuers may not offer you a balance transfer promotion,” says Detweiler.
But if you can manage it, a balance transfer could give you a fresh start and may even allow you to pay off the balance interest free.