What is a penalty APR on a credit card?

Penalty annual percentage rates (APRs) are high interest rates that can be triggered by the slightest infraction such as just one payment that is received a day late. Often these APRs range from 20% to 35%. Lenders increase borrowers’ interest rate significantly and profit from their mistakes.

As a result of the Credit CARD Act, the only way a credit card company can apply a Penalty APR to an existing balance (i.e. purchases you have already made) is if you are 60 days delinquent in making a minimum payment. A re-pricing of your APR for any other reason can only affect future transactions, and cannot occur in the first 12 months of your agreement.

A rate increase that applies to future transactions does not have restrictions under the Credit CARD Act and can happen for any reason the credit card company wants (including missing one payment or going over your credit limit). If the credit card company changes your interest rate, it is required to send you a notice specifying the reason for the rate increase 45 days in advance, and the rate increase can only apply to purchases made 14 days after the notice was sent.

The CARD Act also states that, once the rate is increased on an existing balance because you were 60 days delinquent, the credit card company must move you back down to your non-penalty APR once you have made timely payments for 6 consecutive months.

Details are spelled out in “the fine print” of a credit card disclosure statement. To summarize, current rules for penalty APRs are as follows. If you are late up to 60 days past the due date, interest rates can only be raised on future transactions and not any outstanding balance. At or after the 60-day mark, however, a card issuer can impose a penalty APR on outstanding balances as well, provided adequate notification is made.

In addition, the notice must indicate that the penalty APR will terminate no later than 6 months after the date on which it was imposed if required minimum payments are received on time during that period. Common “triggers” for penalty APRs injclude exceeding your credit limit and making a late payment or two consecutive late payments. Thus, consumers who make late credit card payments get penalized twice: once with a penalty APR and again with a late fee.

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