Understanding credit card penalty rates.
One false move and BAM!
Ever notice all of that fine print associated with credit card offers? It really pays to read beyond the headline when it comes to credit cards. What sounds like a great offer up front, e.g., 0% for 6 months, can have a lot of strings attached. One of the strings associated with many credit cards is penalty rates. That’s the APR, or annual percentage rate, you’ll pay if you are late making a payment or payments.
While the Card Act of 2009 has helped to better protect consumers from exorbitant rates and fees, there are still plenty of loopholes that allow even those financial institutions following the rules to get in your pocket, one way or the other. While the Card Act placed limits on “fees” that could be charged, it is important to note that currently, there are no real caps on the penalty “rates” a credit card issuer may charge.
There are two different ways you may pay for being late on just one credit card payment:
• A one-time late fee. We all understand that there has to be some kind of penalty in place for missed or late payments. However, these fees vary tremendously and can be as high as $35 for a second late payment, though the Card Act does place limits on these fees.
• A penalty rate. While getting hit with a late payment fee is a bit of a blow, get ready to turn the other cheek for a big upper cut on this one! A penalty rate is the new rate you may be paying on your balances for a long, long time (many card companies still say indefinitely) if you make just one false move. The most common trigger for the penalty rate is a late payment but paying less than the minimum balance, paying with insufficient funds, or going beyond the credit limit can also trigger the penalty rate.
Learn more here about penalty rates here.
Our advice? Always read the fine print.