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Beware of Penalty APRs

January 18th, 2018

Credit cards are a great convenience, but before you apply for one, make sure you understand the different annual percentage rates (APRs) you may be charged to use it. A penalty APR is one of these rates.

What Are Penalty APRs?

Some credit card companies offer cards with low purchase APRs, but if you read the terms carefully, you may see it also imposes penalty APRs for missing a minimum monthly payment due date by more than 60 days. Credit card providers use this high interest rate to encourage their card holders to pay their bills on time.

According to monthly credit card rate reports in June 2017 by CreditCards.com, the national average credit card APR was 15.18%. If you have a credit card with a penalty APR, you could be charged 29.99% in interest or more for missing a payment.

How Penalty APRs Affect Your Credit

Say you have a credit card with a 15% APR. You’re late with your payment and your credit card provider hits you with a penalty APR of 29.99%. This means your annual interest cost will increase by almost 100%.

At double the interest, it could take you longer to pay off your debt since more of your payment will go toward the interest instead of the principal. It may also affect your ability to pay your credit card bills on time in the future.

What to Do If a Late Payment Causes Penalty APRs

If you get hit with a penalty APR, you have options.

First, you can move your balance from this credit card to a balance transfer credit card with a 0% APR. But take note: if you purchase anything with this card, make sure to pay it off within a month so you don’t get charged interest; the purchase APR on balance transfer cards tend to be a higher market rate.

Second, ask your credit card provider to remove the penalty APR. Some will remove it if you make six months of on-time payments after a late payment.

Use Credit Cards Wisely

If you’re looking for a credit card, do your homework first. Find one that offers a low interest rate and no penalty APR. If the one you really want and qualify for has penalty APRs, then make sure you pay on time every month—ideally the full balance. That way you’re sure to avoid the pain of penalties. 



 

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