Penalty APR: What it is and how to avoid it

Credit card interest is calculated based on the annual percentage rate (APR) and is something that should be avoided at all costs. Not only does it hurt your wallet, but it can also eat away at any rewards you may have earned, such as cash back, points, or travel miles. With credit card interest rates reaching record highs, the costs can quickly add up if you carry a balance from month to month. However, what many people may not be aware of is that there is an even more severe consequence for violating your credit card issuer’s terms – a penalty APR.

So, what exactly is a penalty APR? A penalty APR is a higher APR that is 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 having 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 are a Chase Sapphire Reserve cardmember and fail to pay, you could be charged a penalty APR of up to 29.99% on your outstanding balance. It’s important to note that penalty APRs vary by issuer, so it’s a good idea to check your credit card’s rates and fees disclosure to understand the specific penalty APR for your card.

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. In addition, a penalty APR can 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 is 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. However, if you fail to address the underlying issues, the penalty APR will remain on your account. In some cases, like with the Chase Sapphire Reserve, the penalty APR can continue indefinitely if your account remains in poor standing.

If you find yourself charged with a penalty APR, there are steps you can take to address the issue. First, contact the credit card company and explain the reason for the late payment or other factors leading to the penalty APR. It’s possible that the penalty APR could be reduced, or at the very least, it doesn’t hurt to try. Additionally, try to avoid using your credit card to keep the balance down and avoid additional interest accruing at the penalty APR rate. Finally, make sure to read your credit card agreement to understand why the penalty APR was applied and what steps you need to take to get it removed as soon as possible.

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. It is also essential to stay organized with your finances. If you find yourself juggling multiple credit card payments, set up autopay so that at least your minimum payment is made on time. If automatic payments are not an option, set reminders or alerts on your phone or calendar to ensure you do not forget to make your payments. If you are using autopay, make sure that your connected checking account always has sufficient funds to avoid a returned payment.

In conclusion, a penalty APR is a severe consequence for violating the terms of your credit card agreement. It is crucial to take a penalty APR seriously, as it is applied to both the outstanding balance and any new charges. While some card issuers may review your account after six months of good financial behavior, if bad financial behavior continues, the penalty can last indefinitely. To avoid penalty APRs and further financial headaches, always make the minimum payment on time and strive to maintain a good credit card account standing.

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