Penalty APR

A penalty APR is an increased annual percentage rate that a credit card account agreement allows the issuer to impose after a specified event, such as a late payment or a returned payment. Regulation Z calls it a "penalty rate" and requires it to be disclosed in the application table, the Schumer box, with "the increased rate that may apply, a brief description of the event or events that may result in the increased rate, and a brief description of how long the increased rate will remain in effect" (12 CFR 1026.60(b)(1)(iv)). The model forms label that row "Penalty APR and When it Applies."

What the rules control is not the size of the penalty rate but where and when it can land. Regulation Z treats a card's existing balance and its new transactions differently, so the same missed payment can raise the rate on next month's purchases without touching the balance already on the card.

Two routes, two balances. Regulation Z's general rule bars a card issuer from increasing an APR on a credit card account, and then lists exceptions (12 CFR 1026.55). Two of them carry a penalty rate.

• New transactions, after notice. Under the advance-notice exception at 1026.55(b)(3), an issuer can raise the rate for future transactions after giving the notice 1026.9(g) requires: written, "at least 45 days prior to the effective date of the increase," and sent "after the occurrence of the events" that trigger it. The higher rate may not be applied "to transactions that occurred prior to or within 14 days after provision of the notice," and this exception is not available "during the first year after the account is opened."
• The existing balance, after 60 days. The delinquency exception at 1026.55(b)(4) lets an issuer raise the rate on the balance already owed only when it has not received "the consumer's required minimum periodic payment within 60 days after the due date." This route is not subject to the first-year bar.

The cure, and its limit. For a 60-day increase, the notice must say that the increase will stop if the issuer receives "six consecutive required minimum periodic payments on or before the payment due date," and the issuer must then restore the earlier rate. The restoration covers transactions that occurred before or within 14 days after the notice. Purchases made after that window can keep the penalty rate, so paying on time for six months does not by itself reset the whole account.

What the notice must say. A penalty-rate notice must state that the penalty rate has been triggered, the date it will apply, when it will stop or that it may remain in effect indefinitely, which balances it applies to, any balances that keep the current rate, and, for a card, up to four principal reasons for the increase in order of importance (1026.9(g)(3)). If it arrives with the periodic statement, those terms must be in a table on the front of a page.

The six-month review. When an issuer raises a card's rate in a way that needs 45 days' notice, 12 CFR 1026.59 requires it to evaluate the factors behind the increase, or the factors it now uses for similar new accounts, and to reduce the rate "as appropriate." The review must happen "not less frequently than once every six months after the rate increase," and any reduction must be made within 45 days of completing it. For a 60-day delinquency increase, no review is needed before the sixth payment due date; if the cure does not restore the rate, reviews begin no later than six months after that payment. The duty ends once the rate is back to where it was, or lower.

What the table will not say. The official interpretation tells issuers to describe the trigger briefly, as "make a late payment," even where the existing balance can be repriced only after 60 days, and to say the penalty rate "may apply indefinitely" if the agreement reserves that right. It bars them from listing the legal limits above in the table.

The sequence starts with a triggering event and runs through a notice, a waiting period and, in the end, a cure or a review.

For example: Imani has carried a $4,000 balance on a card she opened three years ago, at 22%. Her agreement sets a penalty APR of 29.99% for a late payment.

• She pays 10 days late once. The issuer may send a 45-day notice raising the rate to 29.99% for new purchases. Her $4,000 balance, and anything she buys within 14 days after the notice, stays at 22%.
• She falls more than 60 days behind instead. The issuer may apply 29.99% to the existing $4,000 as well, after the 45-day notice. Interest on that balance rises from about $73.33 a month ($4,000 × 22% ÷ 12) to about $99.97 ($4,000 × 29.99% ÷ 12), roughly $26.63 more each month.
• She then makes six minimum payments on time in a row. The rate on the balance that existed through 14 days after the notice must return to 22%. Purchases made after that can stay at 29.99% unless a later six-month review lowers the rate.

Pros

• The penalty rate, its triggers and its duration must be disclosed before you apply, so it can be compared across cards.
• A payment that is late by less than 60 days cannot raise the rate on the balance you already owe; that takes a payment more than 60 days late.
• Every penalty increase needs 45 days' written notice, and a 60-day increase comes with a defined way back.
• Issuers must re-evaluate a raised rate at least every six months.

Cons

• A late payment can raise the rate on all new purchases for as long as the agreement allows.
• The six-payment cure restores the old rate only on the balance from before the notice window, not on later purchases.
• The review requires a reduction only "as appropriate," so the issuer decides whether to lower the rate.
• The application table may say the penalty rate can apply indefinitely, which understates the legal limits on how long it can last.