Penalty APR: What it is and how to avoid it

Credit card interest is calculated based on the annual percentage rate and is something you want to avoid paying. Apart from hurting your wallet, interest charges can chip away at any rewards you've earned, whether it be cash back, points or travel miles. With credit card interest rates at record highs, the costs can quickly add up if you carry a balance month-to-month.

Even worse, if you violate your credit card issuer's terms, you may be subject to a penalty APR. This article explains what a penalty APR is, how it works and how to avoid it.

What is a penalty APR?

A penalty APR is a higher APR that's applied to your credit card balance if you violate the terms of your credit card agreement. These violations can include failing to make a payment, exceeding your credit limit or a returned payment due to insufficient funds. The penalty APR replaces your current APR and is usually much higher than your regular interest rate.

For example, Chase assesses a penalty APR when a cardmember is more than 60 days late in making a payment. So, if you're a Chase Sapphire Reserve® (see rates and fees) cardmember and fail to pay, you could be charged a penalty APR of up to 29.99% on your outstanding balance. Note that penalty APRs vary by issuer, so it's a good idea to check your credit card's rates and fees disclosure.

Related: Best zero-interest credit cards

How does a penalty APR work?

A penalty APR replaces your regular APR. While lower APRs are often the result of having a good credit history, penalty APRs are not influenced by your credit score. A penalty APR can also stay on your account for up to six months. This is due to a federal law that requires credit card companies to review accounts after six consecutive on-time monthly payments have been made.

To restore your regular APR, it's critical that you address the reason behind the penalty APR. If applicable, getting your balance back within the credit limit and ensuring all future payments are made on time will help.

If you fail to address the underlying issues, the penalty APR will remain on your account. In the case of the Chase Sapphire Reserve, its rates and fees disclosure states that a penalty APR can continue indefinitely if a cardmember's account remains in poor standing.

Related: What is APR on a credit card?

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What to do if you're charged a penalty APR

Seeing a penalty APR on your account can be worrisome, especially if you've missed a payment due to financial duress. Here are some steps to take if your account has been slapped with a penalty APR.

• Call the issuer: Contact the credit card company and explain your reason for the late payment or other factors leading to the penalty APR. It's possible the penalty APR could be reduced; at the very least, it doesn't hurt to try.
• Avoid using your credit card: To keep the balance down and avoid additional interest accruing at the penalty APR rate, try not to use your credit card.
• Read the credit card agreement: Make sure you understand why the penalty APR was applied and what you can do to get it removed as soon as possible.

How to avoid a penalty APR

The best way to avoid a penalty APR is to keep your credit card account in good standing. This includes making all of your payments on time and staying within the credit limit.

Beyond that, we recommend that you stay organized with your finances. If you find yourself juggling multiple credit card payments, set up autopay so you at least make your minimum payment on time. If automatic payments aren't an option, set reminders or alerts on your phone or calendar.

If you are using autopay, make sure that your connected checking account always has sufficient funds in order to avoid a returned payment.

Related: 5 ways to use credit cards responsibly

Bottom line

A penalty APR will be applied if you violate various terms of your credit card agreement, such as by missing payments or exceeding the credit card limit. You should always take a penalty APR seriously, as the rate is applied to both the outstanding balance and any new charges.

While many card issuers will review your account after six months of good financial behavior, the penalty can last indefinitely if bad financial behavior continues. It's always a good idea to pay the minimum on time to avoid penalty APRs that can cause further financial headaches.