Credit Card Default and Penalty Rates Explained

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Your credit card comes with a regular APR that's applied to your purchases, balance transfers, and cash advances when you carry a balance or you're not under a grace period. The APR, or annual percentage rate, assigned is based on the credit card and your credit history at the time you apply.

As long as you stick to the terms of your credit card and keep your card in good standing, you'll enjoy your lower interest rate. Certain mistakes, however, can trigger the penalty rate, an interest rate that can make it more expensive to carry a balance and harder to pay off your credit card.

The chart below illustrates credit card delinquency rates from 1991 through today.

What Is a Credit Card Penalty Interest Rate?

The credit card penalty rate, which is also known as the default rate, is the highest interest rate charged by a creditor or lender. The penalty rate is charged as a consequence for becoming delinquent on payments by 60 days or more, exceeding the credit limit, or having your credit card payment returned by your bank.

Credit card penalty rates are commonly around 29.99%, but can be higher or lower with some credit cards. To put it in perspective, the finance charge would be $20.54 on a $1,000 credit balance at a 29.99% penalty rate. Compare that to the $10.27 finance charge you'd pay on the same balance but at a much lower 15% interest rate and you'll see just how expensive the penalty rate can be.

Some credit cards don't charge a penalty rate. Check your credit card terms to see the penalty rate and when it applies.

If your credit card issuer increases your interest rate to the penalty rate, you can have it lowered in six months as long as you make each monthly payment on time. 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.

Some credit card issuers may extend the penalty rate to other credit cards you have with them, even if those accounts are in good standing.

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.

  1. Make all your payments on time. If you're late on one payment, get caught up quickly. the penalty rate kicks in after you're 60 days delinquent, i.e. two missed payments in a row.
  2. Stay below your credit limit. While many credit card issuers have eliminated the over-the-limit fee, some still charge the penalty rate if go over your limit.
  3. Make sure you have enough money in your checking account to cover your payment. Returned checks not only lead to a returned payment fee, but they also trigger the penalty rate.

Thanks to the Credit CARD Act of 2009, there's no more universal default where any creditor could raise your rate to the penalty rate just because you were late or over the limit with another credit card.

Credit and Loan Industry Default Rate

A different type of default rate is used by the credit and loan industry to measure the number of credit cardholders and loan borrowers who are late on payments. This default rate considers credit cards that are past due, but haven't been charged-off or bankrupted 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.

Article Sources

  1. Consumer Financial Protection Bureau. "When Can My Credit Card Company Increase My Interest Rate? What Can I Do to Get the Rate Back Down?" Accessed Oct. 31, 2020.

  2. Federal Reserve Board. "Charge-Off and Delinquency Rates on Loans and Leases at Commercial Banks." Accessed Oct. 31, 2020.