Credit Card Penalty APRs: Why They Could Last Forever

Stressed woman paying credit card bills
••• JGI/Jamie Grill

Federal law allows credit card issuers to impose a penalty interest rate if you become more than 60 days delinquent on your credit card payment. As the name suggests, it's a sort of punishment for your missed credit card payments. You lose the interest rate you’re currently enjoying, even if it's a promotional rate, and your finance charges will be calculated under the much higher penalty rate for at least six months.

This 60-day period is twice as long as what it was before 2009, thanks to the Credit CARD Act. Before that act introduced a number of consumer protections, card issuers could begin imposing a penalty APR after just one missed payment. Additionally, lenders must now provide a 45-day notice after the payment is delinquent before they can actually implement the rate change.

As the above chart shows, credit card delinquency rates have been on a general decline since 2009, even with a recent uptick. That means fewer people are subject to penalty APRs. Still, it's important to be aware of the penalty rate and how to avoid it.

The 6-Month Penalty APR Expiration Rule

Unlike in the past, there are limits to how long the penalty rate can last under the CARD Act. Once you make six consecutive monthly payments, card issuers are required to lower your penalty rate on your existing balance back to the regular credit card APR. Unfortunately, this doesn't apply to any future purchases. Your card issuer can keep the penalty rate indefinitely for any new purchases.

Read your credit card terms (found at your credit card issuer’s website, available upon request, or in the federal database of credit card agreements) to learn your penalty APR and whether your card issuer leaves it in effect for new purchases. Look for a section labeled something like "Your penalty rate and when it applies."

Bank of America's terms, for example, note that it may apply a penalty rate if you are late on your payment. Its current penalty APR will last indefinitely and won't exceed 29.99%. A credit union such as PenFed, however, has lower rates in general, including a lower penalty APR of 17.99%, which it removes after you make three consecutive on-time payments. Still, many other issuers have no penalty rate at all.

In a recent card survey conducted by The Balance, about a third of credit cards had a penalty APR, and the penalty rate averaged 28.74%

How to Avoid a Penalty APR

There are several ways to stay away from penalty rates on your credit card. Of course, the best way is simply to pay on time, in full every month. Whether you have already incurred a penalty APR or not, you won't pay interest if you don't carry a balance.

But, if you do end up with a penalty rate and can't avoid some interest charges, there are still ways to get around it. If you have a strong history of on-time payments with your card issuer, they might be willing to negotiate with you and remove your penalty rate sooner rather than later. You can also make it a point to only apply for credit cards that don't have a penalty APR.

Another option you have when facing a penalty APR is to start fresh. If you can qualify for a card with a zero- or low-interest promotion for initial balance transfers, you could move your new balance over to a new card, pay it off with little or no interest, and start over with a better APR.

Make sure you understand what triggers the penalty rate, whether it's paying late, having a payment returned, going over your credit limit, or all of the above. If you have multiple credit cards or loans with a single lender, defaulting on one of those accounts might trigger the penalty rate on your other account. Note, however, that credit card issuers are no longer allowed to raise your APR based on your actions with accounts with other creditors and lenders (this practice was known as universal default).

When Your Penalty Rate Doesn't Expire

If you trigger the penalty rate on a credit card APR that leaves it in effect indefinitely, realize that all your new purchases will be charged interest at the higher APR, even after the penalty rate expires for your previous balance. This means your new charges will have much higher finance charges and will be more expensive to pay off. 

If you end up carrying balances with different interest rates, your payments may be subject to payment allocation rules. Any payment you make above the minimum must first be applied toward the balance with the higher interest rate. It's therefore especially critical that you pay above the minimum amount if you still have some balances with a higher rate than others. Otherwise, you might be racking up interest on the higher balance.

The Bottom Line

Your credit card APR can have a significant impact on your finances. Make sure you understand what actions will cause the penalty rate so you can avoid having it imposed at all, even if it expires after six months. For credit cards that don’t have a penalty rate, be aware that there may be other punitive fees instead, such as a late payment fee, which are equally unattractive.

Article Sources

  1. Consumer Compliance Outlook. "Six Exceptions to Rule §226.55(b): Limitations on Increases in APRs, Fees, and Charges." Accessed May 12, 2020.

  2. Consumer Action. "Know the New Credit Card Law." Accessed May 12, 2020.

  3. Bank of America. "Example of Credit Card Agreement for Bank of America Rewards™, Bank of America® Accelerated Rewards® and Bank of America® Accelerated Cash Rewards™ American Express® Card Accounts." Accessed May 12, 2020.

  4. PenFed Credit Union. "PenFed Platinum Rewards Visa Signature Card." Accessed May 12, 2020.

  5. Consumer Financial Protection Bureau. "§ 1026.53 Allocation of Payments." Accessed May 12, 2020.