Penalty APR: What it is and how to avoid it

Credit card interest can be a burden on your finances, especially if you carry a balance month-to-month. Not only does it hurt your wallet, but it can also chip away at any rewards you’ve earned, such as cash back, points, or travel miles. With credit card interest rates at record highs, the costs can quickly add up. However, there’s something even worse than high interest rates ā€“ the 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. This 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 regular interest rate and is usually much higher.

For example, Chase assesses a penalty APR when a cardmember is more than 60 days late in making a payment. If you’re 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 crucial to check your credit card’s rates and fees disclosure.

A penalty APR works by replacing your regular APR. While lower APRs are often a result of having a good credit history, penalty APRs are not influenced by your credit score. Additionally, 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’s crucial to 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 the account remains in poor standing.

If you find yourself charged with a penalty APR, there are steps you can take. First, contact the credit card company and explain your reason for the late payment or other factors leading to the penalty APR. It’s possible that the penalty APR could be reduced, so 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. It’s also important to read the credit card agreement to understand why the penalty APR was applied and what you can do 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 your credit limit. It’s also helpful to stay organized with your finances. If you have multiple credit card payments, set up autopay so at least your minimum payment is made on time. If autopay isn’t an option, set reminders or alerts on your phone or calendar to ensure you don’t miss a payment. If you are using autopay, make sure your connected checking account always has sufficient funds to avoid a returned payment.

In conclusion, a penalty APR can have a significant impact on your finances if you violate the terms of your credit card agreement. It’s crucial to take a penalty APR seriously, as it is applied to both your outstanding balance and any new charges. While some card issuers may review your account after six months of good financial behavior, if bad behavior continues, the penalty can last indefinitely. To avoid penalty APRs and further financial headaches, it’s essential to make your minimum payment on time and maintain good financial habits.

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