Credit Card Penalty and Default Rates Explained

A woman looks over her credit card penalty APR terms.
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Your credit card comes with a regular APR that's applied to your purchases and balance transfers when you carry a balance or you're not under a grace period. However, just one late payment could result in the issuer applying to your account a penalty APR that’s considerably higher than your regular APR.

What Is a Credit Card Penalty Interest Rate?

A credit card’s penalty rate is a rate the credit card issuer charges you that’s higher than your regular APR. Not all cards have a penalty APR but, if yours does, you can find the percentage in the terms and conditions of your card's fine print. It's usually located in the rates table below the regular and cash-advance APRs

How Do Credit Card Penalty Interest Rates Work

If your card has a penalty APR, your issuer can apply the rate to your existing balance if you are more than 60 days late on a payment. If they do so, by law they have to notify you of the rate increase 45 days in advance. 

However, your issuer can implement a penalty APR for future transactions for any number of reasons. For example, the Citi Double Cash applies a penalty rate if you make one late payment or have a payment returned, and the rate could apply to your account indefinitely. Other cards may charge the penalty APR for two consecutive late payments or exceeding your credit limit.

The average credit card penalty rate is currently 28.58%, with many credit card issuers charging a steep 29.99%. To put it in perspective, the finance charge on a $1,000 credit balance at a 29.99% penalty rate would amass $349.65 in interest after one year. Compare that to the $223.90 finance charge you'd pay on the same balance but at a much lower 20.21% interest rate (the current credit card average) and you'll see just how expensive the penalty rate can be.

If your credit-card issuer implements a penalty rate due to a late payment of 60 days or more, you can have it lowered in six months as long as you make six consecutive on-time minimum payments. That means make your payment on time, stay within your credit limit, and always have enough money in your checking account to cover your credit card payment so that your payment isn't returned.

Depending on your credit card terms, the rate might only go back down on your existing balance. Some creditors may still apply the higher rate to new purchases made after the penalty rate became effective.

Other credit card issuers can raise your interest rate, even if those accounts are in good standing, but must give you 45-day advance notice of the rate increase and the chance to reject the higher interest rate.

What Is the Default Rate?

Because of the names, the penalty rate is sometimes confused with the default rate. The credit and loan industries use the default rate to measure the number of credit cardholders and loan borrowers who are late on payments. This rate considers credit cards that are past due but haven't been charged-off, accounts discharged in bankruptcy, and mortgages and auto loans that are more than three months past due.

The default rate can be used to measure the health of the economy. Rising default rates–more borrowers being late on their credit card and loan payments–could mean the economy is experiencing difficulty. High mortgage default rates mean an increase in home foreclosures could be on the way.

The chart below illustrates credit card delinquency rates from 1991 through 2020:

3 Ways to Avoid the Penalty Rate

It's not hard to avoid the penalty rate on your credit card balance. Follow these basic rules and you can avoid having your interest rate increased to the penalty rate.

Contact Your Credit Card Issuer for More Payment Options

If you’ve already missed one payment and there’s a chance you could miss your next one, contact your credit card issuer before your next due date rolls around. Your card issuer may have hardship options that can lower or delay our payment.

Choose A Credit Card That Doesn’t Charge A Penalty Rate

Setting a reminder in your phone can help you track your payment due dates, but if that doesn’t work, consider a card that doesn’t have a penalty rate: the Apple Card, Citi Simplicity, or any of Discover’s credit cards.

Your credit score will still be impacted if your late payment is reported to the credit bureaus.

Automate Your Minimum Payment

You can always make a larger payment toward your balance later, but scheduling the minimum payment to be made automatically on the due date ensures you never miss a payment. Be sure you have enough money in your bank account to avoid a returned payment.