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

Penalty APRs are meant to dissuade you from missing a credit card payment.

Layla Bird / Getty Images

A penalty annual percentage rate, or APR, is a punitive interest rate used to discourage cardholders from certain behaviors. 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 there are ways to avoid it. 

What is a penalty APR?

Credit cards have a handful of different annual percentage rates, or interest rates, that apply to purchases, introductory offers, balance transfers and cash advances. A credit card APR can be fixed or variable, which means it can increase or decrease based on the rates set by the Federal Reserve. But credit cards also carry another APR that’s outlined in their terms: the penalty APR.

A penalty APR can only take effect if a payment is missed, if you charge over your card’s credit limit or if a payment is returned due to insufficient funds or a closed account. It’s typically much higher than other APRs, and can leave your finances in an uncomfortable position.

How a penalty APR works

If you miss a payment, have a payment returned -- for example, if a check bounces -- 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 rate of around 19.42%, according to CNET’s sister-site Bankrate, as of the end of 2022.

Keep in mind that most credit card accounts include a 21-day grace period between when your statement is issued and your payment becomes past due. You can take advantage of this time to avoid paying interest charges. So long as you pay your full statement balance each month by the due date, you won’t have to worry about accruing any interest, penalty or otherwise.

Missing a single payment could trigger the penalty APR to apply to any purchases you make following that 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. But there are a few things that would need to happen first.

Protections in the CARD Act of 2009

Per the CARD act of 2009, a credit card issuer can’t increase your credit card’s standard APR for your first year with the card. 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 do 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 following 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 won’t only result in a penalty APR, but it’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. They’re often capped around 29.99%, however, which means even if the Fed increases the benchmark rate the penalty APR won’t exceed 29.99%. But that’s still high enough to fervently avoid.

To give some context, if you carry a balance of $600 on a credit card with an APR of 19%, it would take you 64 months to pay it off by paying only the minimum of $15 and 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 for at least six months, but it could go for even longer if you fail to make six consecutive on-time payments. When a credit card issuer applies a penalty APR, they must review your account every six months. If you continue to miss payments, the clock will reset.

How a penalty APR can affect your credit

A penalty APR itself 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. 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 -- contributes heavily to your credit score, and the credit bureaus (Experian, Equifax and TransUnion) like to see your utilization stay below 30%.

How to avoid a penalty APR

There are a number of steps you can take to avoid a penalty APR:

  • Pay your full statement balance each month. This will ensure you can take advantage of your card’s 21-day grace period and avoid all interest charges, while ensuring you’re making your payments on time.
  • Setup automatic payments. Some credit card issuers allow you to schedule your payments.
  • Set alerts. If your issuer doesn’t support automatic payments, you can still likely set it up so that an alert is sent to you ahead of your payment.
  • Budget yourself. If you manage your monthly spending, your minimum payment will be lower and therefore easier to pay.
  • Contact your issuer. If you know you’re going to have trouble meeting your monthly payment, contact your issuer ahead of time. It might work with you to temporarily allow you to miss a payment or to lower your minimum payment.

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.

Evan Zimmer has been writing about finance for years. After graduating with a journalism degree from SUNY Oswego, he wrote credit card content for Credit Card Insider (now Money Tips) before moving to ZDNET Finance to cover credit card, banking and blockchain news. He currently works with CNET Money to bring readers the most accurate and up-to-date financial information. Otherwise, you can find him reading, rock climbing, snowboarding and enjoying the outdoors.