4 Credit Cards with Giant Penalty Interest Rates

Source: Thinkstock

Source: Thinkstock

Credit cards: They can be helpful financial tools that aid in building and improving credit, or they can become absolute financial nightmares. The difference lies in how they are used and of course, how they’re repaid. If you use only a small portion of your available credit — less than 30% — and then repay your balance at the end of each month, your credit card will probably serve you well. However, if you think of your credit card limit as available money you can spend and max out your card, fail to repay your balance, and get behind, you could end up with a large bill that continues to grow and grow.

In spite of all of the published data and information on responsible credit card usage, many consumers are still delinquent on their credit cards. As of the second quarter of this year, the Federal Reserve Board reports the charge-off rate on credit cards at 3.34. “Charge-offs, which are the value of loans removed from the books and charged against loss reserves…for any category of loan are defined as the flow of a bank’s net charge-offs (gross charge-offs minus recoveries) during a quarter divided by the average level of its loans outstanding over that quarter,” the FRB reports. In a nutshell, charge-offs measure the amounts of money credit card issuers do not expect to recover from borrowers who are seriously delinquent. A charge-off generally occurs after a period of 180 days of missed payments, and consumers who have an account charged-off end up with a serious red mark on their credit file.

In addition to charge-offs and other negative marks on their credit file, consumers who fail to pay their credit card bills on time may face other negative consequences. Even those consumers who miss just a payment or two may end up facing serious monetary penalties. These penalties may come in the form of late fees, normal interest that piles up month-to-month, and higher penalty interest rates. Some consumers are surprised to see their rate jacked up to 28% after a few missed payments, but it’s more common than you may think.

CreditCards.com recently analyzed penalty interest rates in its 2014 Credit Card Penalty Rate Survey. The credit card site analyzed 100 U.S. cards to obtain its information. Overall, the average penalty interest rate for those who fall 60 days or more behind on their credit card payments is 28.45%. At a penalty rate this high, an average cardholder (with an 11.82% APR) who holds a $4,000 balance would have to pay $665.20 extra per year in interest alone.

Here are the cards that have the highest penalty rates, based on the CreditCards.com survey:

  1. NFL Extra Points card from Barclays — 30.24% penalty rate
  2. CitiBusiness AAdvantage Platinum Select card — 29.99% penalty rate
  3. Marathon Visa credit card – 29.99% penalty rate
  4. Fifth Third Bank Platinum MasterCard — 29.99% penalty rate

Do you know your credit card’s penalty interest rate?

Your card may have no penalty rate at all, or it could have a rate in the 30% range. The rate is based on your card issuer’s policies and some companies based this rate on the prime interest rate and others base it on your credit worthiness. Some credit card penalty rate policies are not as clear as they probably should be. Therefore, it’s a good idea to check with your credit card issuer and find out how much of a penalty rate (if any) applies.

Of the cards analyzed in the CreditCards.com survey, 60 out of 100 had some type of penalty interest rate, but only 23 of them published information about this penalty rate in their publicly available terms and conditions. If you end up being faced with a penalty rate, the CARD Act requires that after six on-time monthly payments, you are no longer subject to the higher rate. However, only around 63% of cards with penalties make that information clear to consumers in the terms and conditions.

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