Am I Stuck With a Penalty APR on My Credit Card?

During an ice hockey game, players who make wrong moves are sent to the penalty box for a number of minutes, but at least there is a clock that tells them when their penalty ends. A credit card user who is 60 days late in making a minimum payment can have a penalty interest rate (sometimes called the default rate) imposed on his or her entire balance. With many penalty interest rates in the 30% range, cardholders want to know how long they’ll have to pay that much.

How Long Will a Penalty Rate Last?

If you fail to make the minimum payment within 60 days of its due date, your account will likely be subject to the penalty interest rate. At that point, your interest rate may have doubled, but hopefully you are making your monthly minimum payments (or more) on time. According to the CARD Act of 2009, credit card issuers must reconsider a cardholder’s penalty interest rates after six months. So as long as you make six consecutive on-time payments of at least the minimum payment due, your interest rate should return to its previous rate.

For example, American Express includes the following in the terms and conditions of its personal credit cards: “If the Penalty APR is applied, it will apply for at least 6 months. We review your Account every 6 months after the Penalty APR is applied. The Penalty APR will continue to apply until after you have made timely payments, with no returned payments during the 6 months being reviewed. The Penalty APR will apply to existing balances only if a payment is more than 60 days late.”

Further, these rules apply only to personal credit cards issued to consumers, not those intended for small-business users. With a small-business card, the penalty interest rate can be imposed in response to a number of infractions. These can include missing a single payment, spending over the credit limit, or having payment returned for insufficient funds. Because business credit cards are largely exempted from the CARD Act, each issuer may have different rules about how and when cardholders may have their penalty interest rates cleared and returned to the standard rates. Therefore, users of small-business cards who are facing penalty interest rates should contact their card issuer for more information.

How to Avoid Paying the Penalty Rate

First, you should do whatever it takes to avoid being penalized. For example, you may be able to request that an automatic bank draft be issued each month for at least the minimum payment. Further, there are some cards that never impose higher rates on delinquent cardholders. Example of cards without a penalty interest rate include the PenFed Promise, the Discover it, and the Citi Simplicity. There are no annual fees for these cards. On the other hand, the PenFed Promise and Citi Simplicity have no rewards programs; Discover it does have a competitive cash-back program.

By the time you are being assessed the penalty interest rate, it is crucial that you continue to make on-time payments. Additionally, cardholders should try to avoid using that card, so as not to accrue even more interest on their purchases. You can also consider transferring the balance to a card that has a lower interest rate. Unfortunately, if you’re paying a penalty rate, you probably can’t qualify for a new account with a 0% APR balance transfer offer because those are available only to applicants with excellent credit. And paying late will have damaged your scores.

Knowing the Rules

Unlike hockey players, cardholders who are subjected to the penalty interest rate will not see a giant clock ticking down the seconds until they are in good standing. By understanding the rules of these penalties, credit card users can take the steps necessary to minimize their interest payments and restore their previous interest rate.

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Image: Andy Dean

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