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What Is a Penalty APR and How Do You Avoid It?

You don’t have to worry about facing a penalty if you pay on time.

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Your credit card’s annual percentage rate, or APR, is the rate at which interest accrues on any balance you carry from one billing cycle to the next. You can avoid interest by paying your credit card balance in full. 

A penalty APR, however, is a punitive interest rate applied to your balance when you miss a payment, or payment is returned.  

Whether it’s applied for missing credit card payments, making charges beyond your credit limit or for another reason, a penalty APR will cost you more money than the standard purchase APR -- but not every credit card charges one, and there are ways to avoid it. Here’s what you need to know about penalty APRs. 

What is a penalty APR?

If you miss your credit card payment, receive a returned payment due to insufficient funds in your checking account (if you’ve set up autopay), or charge over your card’s credit limit, you may be penalized with an interest rate higher than your regular purchase APR. 

A penalty APR can hurt your credit score and leave your finances in an uncomfortable position, but not every credit card charges one. It’s important to read your card’s terms and conditions to understand what triggers a penalty APR, how long it stays in effect and how much the higher rate is. 

How a penalty APR works

If you miss a payment, have an automatic payment returned -- for example, if your monthly payment bounces due to insufficient funds in your checking account -- or if you charge over your credit limit, your credit card issuer could apply its penalty APR. Penalty APRs are typically capped at 29.99%, which is much higher than the average APR of around 20.37%.

Keep in mind that most credit card accounts include a 21-day grace period between when your billing cycle comes to an end and your bill is due. Your balance won’t accrue interest during this time, but you have to pay your statement balance by the due date to avoid paying interest. 

Missing a single payment could trigger the penalty APR, which applies to any purchase you make following the missed payment. Missing two payments, or not paying for 60 days and having your account fall into delinquency, may result in the credit card issuer applying the penalty APR to your statement balance as well as future purchases. 

Protections in the CARD Act of 2009

Credit card issuers can’t increase your credit card’s standard APR during your first year with the card, per the Credit Card Accountability Responsibility and Disclosure Act of 2009. That is, unless a promotional APR ends, the Fed increases the federal benchmark interest rate, or your account has two missed payments (60-day delinquency).

If you miss two payments, the credit card issuer must provide notice 45 days before your APR increases. The notice must state the new APR, why it’s increasing and include that the standard APR will be reinstated after six months of timely minimum payments. It’s important to note that the notice doesn’t have to be a separate communication -- it can be indicated directly on your monthly credit card statement.

Missing payments can result in more than just a penalty APR. They’ll also cost you any promotional intro APR periods that may be included with your card.

How a penalty APR is calculated

Penalty APRs are typically based on a fixed interest rate plus a benchmark rate set by the Federal Reserve. A credit card’s standard purchase APR can be fixed or variable, which means it can increase or decrease based on the rates set by the Federal Reserve. 

Penalty APRs are often capped at around 29.99% -- even if the Fed increases the benchmark rate, the penalty APR won’t go any higher. But that’s still high enough to fervently avoid.

If you were to carry a balance of $600 on a credit card with an APR of 19%, for example, it would take you 64 months to pay it off by paying only the minimum of $15. This would end up costing you $358.02 in interest charges. If you carried the same balance but with a penalty APR of 29%, it would take 143 months to pay off the balance and cost $1,536.54 in interest.

The penalty APR replaces the standard rate at which your balance accrues interest. Interest is typically compounded at a daily rate. To find your daily interest rate, divide your APR by 365 and apply that to your daily card balance.

How long does a penalty APR last?

A penalty APR will last at least six months, but it could go on even longer if you fail to make six consecutive on-time payments. When a credit card issuer applies a penalty APR, it must review your account every six months. However, the penalty APR will remain on your account if you continue to miss payments.

How a penalty APR can affect your credit

A penalty APR won’t affect your credit, but the actions that trigger the penalty will. Missing a payment will lower your credit score, as it impacts your payment history, which accounts for 35% of your FICO score

If you trigger a penalty APR by charging over your credit limit, it’s easy for your balance to quickly exceed 30% of your total available credit. This percentage -- called your credit utilization ratio -- is a ratio of your total available credit to total debt. Experts recommend maintaining a credit utilization below 30% to sustain a healthy credit score. 

How to avoid a penalty APR

There are a number of steps you can take to avoid a penalty APR, including the following:

  • Pay your full statement balance on time each month. You can avoid interest charges and a penalty APR by paying your statement balance in full and on time every month. If you pay only the minimum amount due, you can avoid a penalty APR, but you’ll still accrue interest if you carry a balance. 
  • Setup automatic payments. Some credit card issuers allow you to set up recurring payments so you can automatically pay your credit card bill each month. You can choose to pay your statement balance in full or the minimum amount. But keep in mind that if you opt to pay only your minimum balance each month, you’ll accrue interest on the balance. 
  • Set alerts. If your issuer doesn’t support autopay, you can likely set things up so that an alert is sent to you ahead of your payment due date. 
  • Budget yourself. Set a monthly budget to avoid overspending. If you manage your monthly spending, your minimum payment will be lower and therefore easier to pay.

The bottom line

Missing a payment can lead to a myriad of issues, including a lower credit score and being bogged down by interest charges. Keep the above tips in mind and you should be able to avoid a penalty APR and all the consequences it entails.

The editorial content on this page is based solely on objective, independent assessments by our writers and is not influenced by advertising or partnerships. It has not been provided or commissioned by any third party. However, we may receive compensation when you click on links to products or services offered by our partners.

Liliana Hall is a writer for CNET Money covering banking, credit cards and mortgages. Previously, she wrote about personal credit for Bankrate and She is passionate about providing accessible content to enhance financial literacy. She graduated from the University of Texas at Austin with a bachelor's degree in journalism, and has worked in the newsrooms of KUT and the Austin Chronicle. When not working, she is probably paddle boarding, hopping on a flight or reading for her book club.
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