The penalty APR, also called the default APR, is typically the highest APR charged on your credit cards. If you’re intending to pay off your credit card debt under your original credit card agreement, then avoiding the penalty rate is generally imperative. Once your credit card penalty rate is triggered, it could be hard to get it back down.
Penalty rates are typically 29.99% or higher. On a $10,000 credit card balance, the finance charge would then be almost $250 each month. It would probably take several years to pay the balance with minimum payments because they would barely cover the interest and leave only a little money to reduce the principle each month. Have this happen on several credit cards at one time and you’ll likely find yourself in a very difficult financial position.
What Triggers the Penalty Rate?
The penalty rate can be triggered by a few actions. You could probably avoid the penalty rate by avoiding all of the following:
- Your credit card payment is more than 60 days past due. That means you missed two payments in a row. (You’ll also likely incur a late fee.)
- You write a check to make your payment and the check is returned for insufficient funds. (You’ll also likely pay a returned check fee.)
- You exceed your credit limit.
- You miss payments under a hardship plan, such as one obtained from your credit counseling agency.
How to Get Back Your Old Rate
Here’s the good news, if you can catch up on your balance and remain current on your payments, your interest rate will likely go back to what it was before the default rate kicked in. But, many creditors exercise their right to keep the higher interest rate for all your new purchases. Once you’re caught up, you could avoid the higher rate by avoiding any new charges on your credit card.
What If You’re Late on Purpose?
If you’re settling your debt, you’ll probably be stuck with the default rate and that means your final outstanding balance – the one that you’re going to offer a settlement on – will likely be more than the balance when you first missed a payment. That’s because you may have several months of finance charges and late fees added to your balance. This is a normal part of the settlement process.
Part of your settlement offer will likely be to erase the extra fees and interest that accumulated since you first went past due. You won’t necessarily state it in those terms, but your settlement offer will likely reflect that.