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What Is a Penalty APR?


Credit cards can be a useful tool for managing your finances and accruing rewards. If you have credit card debt, you may be wondering whether a balance transfer could help you cut down on the interest you’re paying on your credit card balance(s). In addition, if you’re behind on payments, you may be paying a penalty APR. Read on to learn about penalty APRs and why they can pose a serious financial challenge for cardholders. 

Penalty APR Basics

When you take out a credit card you’ll start with a baseline APR that applies to unpaid balances you carry from one billing cycle to the next. Credit cards come with an APR range. The better your credit score, the lower your APR will be within that range. As long you make at least the minimum payment on your credit card bill, you’ll stick with your baseline APR. If you always pay your balance in full and you’re just using your credit card for the rewards, you don’t need to worry about the penalty APR on your card.

But if at any point you’re more than 60 days late on making a minimum payment, your credit card company will probably bump you up to a penalty APR. If you read the disclosures that came with your credit card, you will have read about the penalty APR. At any rate, your credit card company will notify you if it’s going to start applying the penalty APR to your balance.

Why Penalty APRs Are a Big Deal

What is a Penalty APR?

Many people miss making the minimum payment on their credit card bills out of necessity, not choice. But if you have the room in your budget, it’s a good idea to keep up with at least the minimum payment (but ideally your entire balance) so you avoid paying a penalty APR. Why? Because a penalty APR can be twice as high as your normal APR.

Another reason to avoid having to pay a penalty APR is that the higher APR doesn’t go away as soon as you make your first minimum payment after landing in the penalty box. Instead, your credit card company can impose the penalty APR for up to six months. Once you make six on-time payments in a row the credit card company must review your rate. Until then, the credit card company can continue to charge you the higher APR.

And the penalty APR doesn’t just apply to the balance you had when the delinquency period kicked in – it applies to your future balance going forward, until the credit card company moves you back down to the regular APR. It’s easy to see how a penalty APR can lead to a credit card debt spiral.

Bottom Line

What is a Penalty APR?

If you’re back on track making on-time minimum payments but you haven’t yet hit the six-payments mark, you may still be able to get your credit card company to review your APR and stop charging you the higher APR. How? By picking up the phone, calling your credit card company and making your case. It’s not guaranteed to work, but it’s worth a try. If you’re concerned that the penalty APR is costing you too much, you can also consider transferring your balance to a zero-APR credit card.

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