Penalty Repricing

Penalty repricing is when a credit card company raises a borrower’s interest rate for failing to make at least the minimum payment on time. It’s also known as behavior-based repricing.

Penalty repricing means that the account’s interest rate rises to the bank’s penalty rate, also called the penalty APR. Many card agreements have a penalty rate listed in the fine print that’s substantially above the regular rate.

Some penalty APRs impose fees that are far worse than others. The rules vary, as well, as some penalty APRs only apply to new balances, while others also affect existing balances. How long the penalty APR applies also depends. Some continue for many months, even once the borrower resumes regular payments.

Regardless of whether a card company institutes penalty repricing, not paying on time incurs consumer penalties, including late fees. In some cases a credit card company shuts off the borrower from making additional purchases, because their credit risk is above a certain threshold.

From the lender’s point of view, penalty APRs reflect the added risk the credit card company sees regarding the potential for future missed payments. The lender doesn’t really make a distinction if health issues or a death in the family kept someone from paying attention to their bills for a few weeks. They think they’re not going to get paid going forward. So they ratchet up the rate as a way to make as much money as they can,  while acknowledging an increased risk of default.

Borrowers may notice a late fee, but too many don’t even realize when the bank applies the penalty rate to their card. Over time, higher rates can cost substantially more in interest payments. The difference between a 10% rate and a 20% rate on a card with a $2,000 balance is still roughly $400, not including the late fee.

Customers who generally pay on time and only missed a single payment likely have some negotiating power regarding the penalty rate. It’s not unheard of to call the bank and ask for a lower interest rate, especially if you have been paying the penalty rate on time for multiple months.

Otherwise, it’s possible to transfer the balance to a card with a lower APR. Just read the fine print and be sure the rate you get is not an introductory APR that rises substantially shortly after switching the balance.

Another tried-and-true option is to try to pay off debt with the highest interest rate as quickly as possible. Try making larger-than-minimum payments, if possible.