The Ins and Outs of Penalty APR: How It Works, How to Avoid It & What to Do if You Trigger It

Written By
Julija A.
July 13,2023

The tough times we are currently facing have taken a toll on many people’s finances. If you are one of the millions of Americans struggling to make ends meet, you may be worried about triggering penalty APR on your credit card.

In this article, we will explain this type of APR, how penalty APRs work, how to avoid triggering them, and what steps to take if you fail. Read on to learn more and ease your worries.

What Is Penalty APR?

A penalty annual percentage rate is a higher interest rate applied by credit card issuers if you miss your minimum payment by 60 days or more or make another mistake that violates the terms of your agreement with the card issuer. We can also define it as a punishment for not following credit card rules. It can go as high as 29.99% and will usually remain in effect for at least six months.

To better answer the question, here’s an example: If you have a balance of $1,000 and are charged a penalty of 29.99%, you would be responsible for paying $299 in interest charges every month until you pay off your balance. Remember that the new rate will apply to your existing balance and future purchases.

This can quickly cause your credit card debt to spiral out of control, as the minimum payment will likely be insufficient to cover the interest charges.

Why Do Credit Card Companies Charge a Penalty APR?

There are different types of credit cards on the market, but they all operate on a risk-based model. The card issuer will evaluate your creditworthiness when you apply for a card and set your interest rate based on that assessment. However, if you make late payments or violate the terms of your cardholder agreement, the card issuer may raise your interest rate even further.

This is because you have now proven yourself to be a high-risk borrower, and the card issuer wants to protect themselves from the possibility of default. Using penalty APR, by definition, lets card companies secure themselves against financial losses and encourage cardholders to start paying on time.

How To Avoid a Penalty APR

Paying a high rate on your balance transfers and future purchases is easily avoidable. We've rounded up a few essential tips to help you stay on track.

1. Make Your Payments on Time and in Full

Paying your credit card bills regularly each month might seem like a no-brainer, but it’s the most important thing you can do to avoid triggering a credit card penalty APR. If late payments seem inevitable, contact your card issuer ahead of time to let it know and ask for an extension.

We recommend you set up automatic payments to ensure your minimum payment is never late. You can also set up reminders on your phone or computer to help you keep track of when your payments are due. By doing so, you can focus on other important things in your life and avoid the stress of worrying about being penalty APRs.

2. Read the Terms and Conditions of Your Cardholder Agreement

It is essential to read the terms and conditions of your credit card agreement as well as the fine print so that you are aware of all the credit card rules and regulations. This will help you understand how your credit card interest works, what can trigger a penalty APR, and when it applies.

3. Keep Your Balance Low

One of the best ways to avoid paying penalty APR - or any APR - on your credit card balance is to keep it low. If you only charge what you can afford to pay off each month, you will never have to worry about accruing interest on your balance.

In case you charge more to your card than you can afford to pay off in full, you will have a higher minimum credit card payment. This will further lead to more interest charges, and eventually, you will end up in debt.

4. Negotiate with Your Credit Card Company

If you have a good history with your credit card issuer, you may be able to negotiate lower interest if you are worried about triggering a higher penalty rate. Give them a call and explain your situation. It’s always worth a try!

Be sure to call and negotiate before missing a payment, as doing it afterward will damage your relationship with the credit card company and make it much harder to negotiate.

5. Credit Cards With No Penalty APRs Might be a Better Fit

If you are concerned about triggering a penalty annual percentage rate, you might consider looking for credit card companies that do not charge it. There are plenty of great options out there that don’t penalize their customers for making late payments.

Find a credit card with a reasonable APR that best meets your needs. Some of the most popular ones are the Citi Simplicity Card, Apple Card, and Petal 2 “Cash Back, No Fees” Visa Credit Card.

What to Do If You Trigger a Penalty APR

If you have a missed payment, don’t panic! There are some things you can do to get back on track.

1. Negotiate

First, call your credit card issuer and explain the situation. You may be able to negotiate a lower interest rate or have the penalty waived if you have a good history with the company. The card issuer might agree to waive the fee if you make the following six monthly payments on time.

2. Pay Down Your Balance

If you are unable to negotiate a lower penalty APR, meaning the issuer refuses to lower or remove the penalty, your best bet is to simply pay down your balance as quickly as possible so that you can get back to paying the regular APR.

This will help you avoid accruing too much interest and getting further into debt. Also, avoid making new charges on the card until you have paid off your balance in full and use a different payment method for new purchases.

3. Transfer Your Balance

Finally, there's an option to transfer your balance to another credit card with a lower APR or try getting a balance transfer credit card with a 0%-introductory-APR promotion. This will save you money on interest charges while you pay down your debt. Be sure to read the terms and conditions carefully before making a balance transfer, as there may be fees involved.

If you follow these tips, you can avoid paying a penalty APR altogether. Just stay on top of your payments and keep your balance low, and you will be fine.


Do you only pay APR if you miss a payment?


No, APR doesn't depend on whether or not you make your payments on time. You can still be charged APR even if you always make your payments on time. However, if you miss a payment, you may be charged a late fee in addition to the regular APR.

What triggers the APR penalty?


Penalty APRs are usually triggered when cardholders miss a payment altogether or make a late payment after more than 60 days.

Also, you can expect to be penalized when your payment is returned because of a closed account or insufficient funds or if you go over your credit limit. In this case, the credit card issuer will likely raise your APR to the penalty rate to punish you for not meeting your obligations.

Why is penalty APR important?


The penalty annual percentage rate is vital because it can significantly impact your finances if you are not careful. The penalty rate is usually much higher than the regular APR, which means you will accrue more interest charges if you trigger it.

In addition, this type of APR will usually last for at least six months and possibly longer, so it's essential to take steps to avoid it.

About author

Albert Einstein is said to have identified compound interest as mankind’s greatest invention. That story’s probably apocryphal, but it conveys a deep truth about the power of fiscal policy to change the world along with our daily lives. Civilization became possible only when Sumerians of the Bronze Age invented money. Today, economic issues influence every aspect of daily life. My job at Fortunly is an opportunity to analyze government policies and banking practices, sharing the results of my research in articles that can help you make better, smarter decisions for yourself and your family.

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