6 tips to avoid penalty rates

By Amy Buttell Crane

Credit card penalty rates can send your monthly bills shooting higher. Keep these six basic steps in mind, and you can avoid the problem, experts say.

Step 1: Know your minimum payment. Each of your credit cards has a minimum payment, usually based on a percentage of your overall balance on that card. Keep track of your minimum payment for each card. It's a moving target as it adjusts monthly based on your interest rate and your balance, so don't assume that your minimum payment last month is the same as your minimum payment this month.

Step 2: Find out your payment due date. Check each of your card statements to find out what day your payment is due. While each card generally sets the same day each month for your payment as a way of standardizing the billing cycle, the day of the week your payment is due will change, and that's something you need to pay attention to, says Tony Shap, president of Payment Max Credit, a credit card processing company.

"One of the top reasons why credit card issuers raise rates is because of late payments, so consumers should watch the calendar day of the due date," he adds. "Some bank due dates fall on a weekend and they don't post payments on the weekend unless you pay by phone." So if your payment arrives on a Saturday, the day it is due, it won't be posted until Monday at the earliest and this late payment could trigger penalty rates.

Step 3: Send your payment in early. If you are paying by mail, mail your check in at least five business days before the due date. Even if you pay online, getting your payment in a day or two before it is due is a good idea, as you can't know how long the company will take to process your payment.

Step 4: Set up an automated payment system. Linda Sherry, a spokeswoman for Consumer Action recommends setting up some type of automatic payment system to make sure your minimum payment is made on each card. If you use online bill paying at your bank or credit union, this is fairly easy to set up. Enter an amount $25 or $50 above your minimum payment for each card to be paid on a date every month a couple of days before the due date. You can adjust this amount manually as your minimum payment changes for each card.

Step 5: Monitor your credit limits. Credit limits vary by card, so check your statement and keep track of what your limits are on each card. If your limit is lowered, contact your credit card issuer to ask why. Many card issuers will raise your limit unasked, and if this is something that you don't want, contact the company to have it moved back down again. By staying under your limits, you can avoid penalty rates.

Step 6: Pay with an overdraft protected account. When you pay your bill, pay from a checking account that has overdraft protection from your bank or credit union. This way, you won't bounce checks or payments you send in to pay your credit card bill, avoiding another circumstance that can trigger penalty rates.

See related: Penalty rates: How to avoid getting flagged; 10 worst credit card mistakes; Study: Too much optimism leads to late card payments; Timing is everything for some credit card payments

Published: September 25, 2008

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