Those who fall 60 days behind in credit card payments face an average penalty interest rate of 28.45 percent, according to CreditCards.com’s survey of 100 major U.S. credit cards
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That’s down slightly from a 28.60 percent average penalty APR in 2012 — but still expensive.
For example, consider a cardholder who carries a $4,000 balance on a card charging 11.82 percent — the average APR for those carrying a balance, according to the Federal Reserve. At the 28.45 percent average penalty rate, the cardholder would have to pay an extra $665.20 in interest a year.
Fortunately for those who carry a balance, the number of issuers using penalty interest rates has decreased dramatically since the 2009 Credit CARD Act capped penalty fees and imposed rules on penalty rates — including a way for consumers to escape them. In 2010, 91 percent of issuers imposed penalty rates. By 2012, the number had fallen to 69 percent. This year, it was just 60 percent.
Among card issuers charging a penalty rate, the lowest, 17.99 percent, is assessed by Pentagon Federal Credit Union’s Cash Rewards Visa Standard card. The highest penalty rate, 30.24 percent, is imposed by the NFL Extra Points card from Barclays (UPDATE: There is no penalty APR on the NFL Extra Points card for new or existing customers).
Highlights from this year’s survey include:
- Sixty of 100 surveyed cards have a penalty interest rate of some kind: 28 have penalty APRs based on the prime rate plus a specified percent, 32 calculate a cardholder’s penalty APR based on creditworthiness. Rates based on the prime rate can move up automatically when that index rises, as it is expected to in 2015.
- Consumers often can’t find out what penalty rates they might face before signing up for a card. Federal law requires penalty rates to be disclosed on monthly statements, not before signing up, and most issuers don’t disclose the penalty upfront. Only 23 cards disclose penalty rate information in the card’s publicly available terms and conditions document. The other 77 cards required follow-up phone calls or review of cardholder agreements filed in a federal database to confirm penalty rate details.
- Almost all issuers of consumer credit cards charge a penalty fee at or near the maximum allowed by federal law. The maximum fee for repeat late payments was capped by law at $35 until January 2014, when it was inflation-adjusted upward to $37. The 87 consumer cards in our survey averaged $34.63, with 70 charging $35, two charging $36 and 10 charging $37. The remaining five charged $25 or less.
- The CARD Act requires lenders to revoke the penalty rate if consumers make six consecutive on-time payments, but just 38 of the 60 cards make that clear in their publicly available documents. Another 18 say penalty rates “may apply indefinitely” and give no further information in publicly available documents.
- Business cards, which are exempt from the CARD Act restrictions, impose the harshest late penalties. The 13 business cards in the survey imposed an average penalty interest rate of 29.14 percent, and an average late fee of $40.15. Two Bank of America business cards have the highest penalty fees found, at $49.
The penalty rate landscape
Before the Credit Card Accountability Responsibility and Disclosure Act of 2009, credit card issuers could penalize late or nonpaying cardholders as they saw fit, which for consumers meant immediate APR hikes and fees heaped on top of any outstanding card balances.
Today, card issuers can only legally impose a penalty rate on a cardholder who has not made at least a minimum payment in 60 days. Only nine cards in the CreditCards.com survey used such wording to explain when a cardholder would face a penalty rate.
Penalty leniency rare
A few of the surveyed cards were found to have policies more relaxed than what the law outlines. For example, the Marathon Visa card issued by Comenity Bank notes that a cardholder must miss three consecutive monthly payments before a penalty rate may be applied.
The cards with the lowest penalty rates are issued by Pentagon Federal Credit Union (17.99 percent) and Navy Federal Credit Union (18 percent). PenFed’s Promise Visa was the only one in the survey to charge no fee for late payments.
The credit unions’ representatives said their low penalty rates put consumer’s best interests’ first.
“Our strategy is not to gouge or make penalty pricing painful,” said Scott Young, vice president of card services for Pentagon Federal. “It’s a balancing act to make sure we can cover our losses and still offer the best cardholder benefits possible.”
Card issuers use two types of penalty rates. One, used by 32 cards, is imposed on a sliding scale based on creditworthiness, with a maximum cap. The other, used by 28 cards, is a variable percent rate using the prime rate, plus an additional markup. Those based on the prime rate will go up next year if the Federal Reserve raises interest rates as predicted in 2015.
Highest penalty APRs
The highest penalty rate, 30.24 percent, is imposed by the NFL Extra Points card from Barclays. (UPDATE: There is no penalty APR on the NFL Extra Points card for new or existing customers.) The next highest penalty rate, 29.99 percent, is a prime rate-based penalty rate set by three cards: CitiBusiness AAdvantage Platinum Select card, Marathon Visa credit card and Fifth Third Bank Platinum MasterCard. Another 24 cards have penalty rates based on individual cardholder creditworthiness that may run as high as 29.99 percent.
When asked how its 29.99 percent was determined, Fifth Third Bank spokeswoman Stephanie Honan said, “We regularly evaluate our products in terms of features, benefits, pricing and rewards and feel that our cards remain competitive within the market.”
Getting out of the penalty box
The CARD Act also requires card issuers to let consumers reverse or “cure” an imposed penalty rate with good cardholder behavior.
“When we were developing the CARD Act in Congress, we called it a ‘road map to recovery,’ so people in a tough spot could be like, ‘Yeah, I screwed up, but at least I have a way to get out if I keep my nose clean,'” said Linda Sherry, director of national priorities for the Consumer Action advocacy group.
The CARD Act stipulates that after a penalty rate is applied after 60 days of nonpayment, a cardholder can earn back a better rate by making six consecutive on-time payments. This means card issuers must re-evaluate your card’s rate increase every six months and, if appropriate, reduce the penalty APR within 45 days of completing the evaluation.
In our survey, 38 of the 60 cards with penalty rates give notice that consumers can “cure” a penalty rate with six consecutive on-time payments. The remaining 22 cards that charge penalty rates were not as transparent about their policies. Eighteen cards’ terms and conditions only state that imposed penalty rates “may apply indefinitely” and give no further information.
“To me, seeing only ‘may apply indefinitely’ is concerning,” Sherry said. “I think that’s something the CFPB should do something about. At least they are saying something about the penalty, but it’s not giving consumers nearly enough information.”
The CFPB did not make anyone available for comment on this story.
According to Ed Mierzwinski, consumer program director and senior fellow for the U.S. Public Interest Research Group, the matter should be reviewed for consumers’ sake. “It’s hard to say what’s really going on behind the scenes, but I will say that weasely words allow weasely practices,” he said.
Despite the technical policy language variations, the CARD Act has made a difference in penalty rate practices over the past few years, according to Mierzwinski.
“I’m getting a lot fewer complaints since the CFPB implemented the CARD Act, and I think banks are being very careful with pushing the envelope of unfair practices overall,” he said. “At least consumers are not facing triple interest rates [hikes] or retroactive interest rates — those were the really damaging practices.”
Disclosure made on statements
Current cardholders should have more luck finding the information, since the CARD Act requires issuers to disclose the consequences of late payments on monthly statements.
They should go beyond that, Sherry said. “As I understand it, issuers are not required to put it in the terms and conditions disclosures or other card solicitations, but they do have the option to add it. The law used to be that the information would go in the penalty fee box below the Schumer Box, but that’s no longer the case.” Before the CARD Act, the Schumer Box of disclosures was the standardized way for issuers to present card details in the publicly available “terms and conditions” page of their offers.
Even if penalty rate information is available, it’s not always an easy thing to find.
“Many times you actually have to click an ‘Apply now’ button to get anywhere close to a link to the important rate disclosures,” Sherry added. “You have to pretend like you are applying just to get more information and that’s counterintuitive. I think a lot of consumers really aren’t seeing the stuff.”
Card issuers aren’t the only ones to blame for information transparency issues.
“The CARD Act was wonderful, but in some ways it didn’t necessarily go far enough and explain what consumers should be given before becoming a cardholder,” Sherry said.
|HOW TO LOCATE PENALTY RATE INFORMATION|
|If you’re curious about a credit card’s penalty rate policy, here are three places to look:|
|Card terms and conditions||Also commonly referred to as “Important rates and disclosures,” this information can be found inside most credit card solicitation mail offers and/or online, either through a direct hyperlink to a separate webpage or PDF with the information. Often, you have to click an “Apply now” link and search the information that appears before the application begins. If the penalty rate details are in the terms, they can likely be found below the purchase APR information in the top portion of the Schumer box.|
|Cardholder agreement||If you are an existing cardholder you would have received the agreement by mail after applying for the card but non-cardholders may be able to view some issuers’ card agreements through the federal Consumer Financial Protection Bureau’s database. Looking into these types of documents will take a bit more fine print reading. Watch for phrases such as “rate increases,” “default APR” and “late payment penalties” to find penalty rate specifics.|
|Customer service phone call||If penalty rate information cannot be located in the terms or cardholder agreement, telephone the customer service number listed on the card’s marketing documents or Web page.|
The Credit Card Penalty Rate Survey of 100 U.S. credit cards was conducted in October 2014 by CreditCards.com. The 100-card survey pool is the same group of cards used to calculate CreditCards.com’s Weekly Rate Report, and is a representative sampling of cards from all major U.S. card issuers. Information was gathered from the cards’ terms and conditions documents, any publicly available cardholder agreements and phone calls to issuers.
The average penalty APR was determined using the rates provided by the 60 cards that disclosed their single and variable penalty APRs. For the cards with a range of penalty rates based on cardholder creditworthiness, the highest possible APR was used in the average rate calculation.