A credit card penalty rate is a fee you pay for missing your credit card payment. Once you’re past your bill due date, the delinquency starts counting, when it gets to 60 days, a penalty rate is imposed. This fee can build up very fast if care is not taken.
You can even lose the promotional rate you’re currently enjoying, and your finance charges will be calculated under the much higher penalty rate for at least six months. It also affects your credit rating.
How long does it last?
Card issuers are now required to lower your credit card penalty rate back to the regular interest rate after you’ve made six consecutive timely payments. But that only applies to the balance that existed when the penalty rate was imposed. It doesn’t apply to purchases made after the penalty rate became effective. Many credit card issuers are keeping the penalty rate indefinitely.
Read your credit card terms to learn about your credit card penalty rate and when it applies. Make sure you understand what triggers the penalty rate, e.g. paying late, having a payment returned, going over your credit limit, or all of the above.
Penalty Rates from Major Credit Card Issuers
Here are the penalty rate clauses from a few major credit card issuers (as of November 2013):
American Express: If the Penalty APR is applied, it will apply for at least 6 months. The Penalty APR will continue to apply until after you have made timely payments, with no returned payments during the 6 months being reviewed. The Penalty APR will apply to exist balances only if a payment is more than 60 days late.
Bank of America: If your APRs are increased, the. Penalty APR will apply indefinitely. Your Penalty APR will not exceed 29.99% on new transactions. There is no Penalty APR on existing balances.
Capital One: If APRs are increased for a payment that is late, the Penalty APR may apply indefinitely. Capital One will periodically. Review any rate increase to your account for a possible rate decrease.
Chase: If your APRs are increased for any of these reasons, the. Penalty APR will apply indefinitely. The reasons are a failure to make the. Minimum payment on time, exceeding your minimum payments (when applicable), having a payment returned, or doing any of these things with another Chase account.
Citi: If your APRs are increased for either of these reasons, the Penalty APR may apply indefinitely. With Citi, the reasons for a penalty rate are late or returned payment.
Discover: No penalty rate for the Discover it cards
PenFed: If your minimum payment is not received within 60 days, your entire account is subject to change to the non-variable Penalty APR. The. Penalty APR will remain in place until you make three consecutive. Monthly payments on or before the due date.
IberiaBank and Wells Fargo do not list a. Penalty APR in their credit card agreements.
If You Get a Credit Card Penalty Rate That Doesn’t Expire
If you trigger the penalty rate on a credit card that leaves it in effect indefinitely, realize that all your new purchases will be charged interest at the higher APR, even after the penalty rate expires for your previous balance. Your new charges will have much higher finance charges and will be more expensive to pay off. This also means you’ll be carrying balances with different interest rates and your payments are subject to payment allocation rules. Minimum payments will go toward the balance with the lower interest rate.
Only payments above the. Minimum will reduce the higher rate balance.
Being that the penalty rate is often close to 30%, and sometimes higher, creating new balances under that interest. Rate isn’t wise unless you plan to pay your balance in full every month.
Make sure you understand what actions will cause the penalty rate so you can avoid having it imposed at all. You can save a lot by making your payments on time.