How Do Credit Card Penalties Work?

by April Lewis-Parks

Credit card penalties can be scary and confusing. Asking your bank to explain the different penalties to you doesn’t help much, as they will tell you to read your statements and contracts. But with all the fine print and legal terminology, how are you supposed to know what you will end up paying and when?

The first thing to understand is when penalties get applied to your account. Although it may differ by company, most creditors apply penalties once you are late with a payment and may apply additional penalties once you are more than 30 days late. Penalties are also applied when you pay less than the amount requested on your bill, as well as when you exceed your maximum credit limit. All of these actions will incur penalties that can affect that credit account anywhere from six months to permanently, depending on your creditor.

The first part of the penalty you incur is a finance charge. Most creditors list the specific late charge fees and over-the-limit fees in the fine print of your credit card statement or in your original contract. These fees are applied one time every time you are late or go over your limit. The fees can really add up, increasing credit card bills much more than what you expected.

In addition to added fees, you also have to worry about penalty interest. Most credit cards have different APRs (annual interest rates) that get applied depending on the type of transaction and when it’ made. In addition, most also have penalty APR that gets applied when you are late, miss a payment, pay less than what’s required, or go over your credit limit. Penalty APR is usually much higher than the regular interest rate on your account. This means your debt grows with faster and costs you more money every month.

A big problem with credit card penalties is that one mistake doesn’t just go away when you get back on track. With some creditors, penalty APR may be applied until you make six consecutive months of payments. With other creditors, penalty APR may be applied for longer and it’s possible that your interest rate is never restored to the original APR.

All of this makes it essential to pay your credit card on time. If you start to have problems meeting all your obligations, don’t wait until you have a slew of penalties before you look for a solution.