Credit card interest is calculated based on an annual percentage rate and is the amount you want to avoid paying. In addition to hurting your wallet, interest charges can also erode any rewards you earn, whether they’re cash back, points, or travel miles. With credit card interest rates at an all-time high, fees can add up quickly if you carry a balance each month.

Even worse, if you violate your credit card issuer’s terms, you could be hit with an APR penalty. This article explains what penalty APR is, how it works, and how to avoid it.

What is the penalty APR?

The penalty APR is the higher APR that is applied to your credit card balance if you violate the terms of your credit card agreement. These violations may include failure to make a payment, exceeding your credit limit, or having your payment returned due to insufficient funds. The penalty APR will replace your current APR and is usually much higher than your normal rate.

For example, Chase will charge a penalty APR when a cardholder is more than 60 days late on a payment. Therefore, if you are a Chase Sapphire Reserve® cardmember and fail to make a payment, you may be charged an APR penalty of up to 29.99%. Note that penalty APRs vary by card issuer, so it’s a good idea to check your credit card’s rate and fee disclosures.

Related: Best zero-interest credit cards

How does the penalty annual rate work?

The penalty APR will replace your regular APR. While a lower APR is usually the result of having a good credit history, the penalty APR is not affected by your credit score. Penalty APR can also remain on your account for up to six months. This is due to a federal law that requires credit card companies to review accounts after six consecutive on-time monthly payments.

To restore your regular APR, it’s critical to address the reasons behind the APR penalty. If applicable, it can be helpful to bring your balance back to the credit limit and make sure all future payments are made on time.

If you fail to resolve the underlying issue, a penalty APR will remain on your account. In the case of the Chase Sapphire Reserve, its rate and fee disclosures indicate that if a cardmember’s account is not in good standing, the APR can continue indefinitely.

Related: What is the APR on a credit card?

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What to do if you are charged an APR penalty

Seeing your account be penalized with APR can be worrying, especially if you’ve missed payments due to financial stress. If your account is penalized, please take the following steps.

• Call the issuer: Contact the credit card company and explain the reason for your late payment or other factors that contributed to the penalty APR. The penalty APR may be reduced; at least, it doesn’t hurt to try.
• Avoid using credit cards: Try not to use credit cards to reduce balances and avoid incurring additional interest at a penalty APR.
• Read the credit card agreement: Make sure you understand why the penalty APR is imposed and what you can do to have it removed as quickly as possible.

How to Avoid Penalty APR

The best way to avoid APR penalties is to keep your credit card accounts in good standing. This includes making all payments on time and staying within your credit limit.

Beyond that, we recommend keeping your finances in order. If you find yourself processing multiple credit card payments, set up automatic payments so you can make at least your minimum payment on time. If automatic payments aren’t an option, set a reminder or reminder on your phone or calendar.

If you use automatic transfers, make sure your linked checking account always has sufficient funds to avoid bounced payments.

Related: 5 Ways to Use Your Credit Card Responsibly

bottom line

If you violate various terms of your credit card agreement, such as missing a payment or exceeding your credit card limit, you’ll be charged an APR penalty. You should always take the penalty APR seriously, as it applies to the outstanding balance and any new charges.

While many card issuers will review your account after six months of good financial behavior, penalties can last indefinitely if bad financial behavior persists. It’s always a good idea to make your minimum payments on time to avoid annual interest rate penalties, which can lead to further financial problems.