Beware the penalty APR

When you’re shopping for a loan, it’s always important to compare the Annual Percentage Rate (APR) of various loan offers. However, when you’re shopping for a credit card, there’s another ate you may want to also look at: the penalty, often called the penalty APR.

The penalty APR refers to an increased interest rate imposed on your account because you’ve been late with payments. In other words, when you’re late with your payments, your penalty is paying more for your credit.

How bad can the penalty APR be? Some institutions charge as high as 29.99%. Of course, nobody gets a credit card with the intent of making late payments. But life happens. Perhaps more important than knowing the amount of the penalty APR on your card is knowing when it goes into effect – and when it must be lowered. These are both matters of law.

According to the Card Act of 2009, a penalty APR can only be imposed if “the consumer has missed two consecutive monthly payments (i.e. 60 days past due) and the consumer has been provided 45 days written notice.” What’s more, the penalty APR isn’t permanent (unless you keep making late payments).

Again, according to the Card Act of 2009, should you make consistent on-time payments for six months, by law, the issuing company must lower the penalty APR. However, it is possible the card issuer will keep the penalty APR on purchases made while the higher rate was in effect. Check your credit card agreement to verify exactly what the penalty APR will look like.

Penalty APRs sound horrifying, but they are avoidable. Setting up an autopay on your account is one of the best to avoid an increased interest rate. Also, make sure the balances on your cards stay low. The lower the balance, the lower the minimum payment, the less money you have to spend.