The good news is that the number of credit card issuers who spike cardholders’ APRs if they miss a payment has fallen pretty significantly in only a year. But (there’s always a “but”) the flip side of that development is that credit card companies who do still charge penalty rates are ratcheting up the APRs — which means it’s more important than ever for consumers to read the fine print on credit card applications. An annual study of penalty rates by CreditCards.com found that the number of cards carrying penalty rates fell significantly last year. In 2011, 69% of approximately 100 cards surveyed had penalty rates. Only a year earlier, that percentage was 91%, which means 30 cards that used to charge late-paying customers a higher APR have now dropped that practice.
The top penalty rate of 2010 has dropped, but the average rate has crept up, from 27.9% to 28.6%. Last year, the highest-charging issuer, HSBC, levied a stiff penalty rate of nearly 32% on customers. But this year, it dropped penalty rates. The highest penalty rates now come from a handful of cards issued by Barclays, all of which charge approximately 30.2%.
One reason why penalty APRs have crept so close to 30%, on average, is that those rates weren’t capped by the CARD Act, whereas late payment fees were. Initial offenses are capped at $25, an amount that rises to $35 for subsequent late payments within a six-month period.
The Credit CARD Act of 2009 limited under what circumstances a credit card company could charge a penalty rate once its key provisions took effect in 2010. To the relief of otherwise responsible customers who make a single late payment, the law stipulates that a customer must be 60 days late before the issuer can lower the boom. What’s more, credit card companies are now required to review the accounts of customers who have been assessed penalty rates and lower them back to the original rate after six months’ worth of on-time payments.