Can Credit Card Companies Change You Interest Rates if You Pay a Day Late?

Making a late credit card payment can be an expensive mistake that puts you deeper in debt. Your card issuer can raise your interest rate substantially, even if your payment is just one day late. Your creditor will likely require you to make payments on time for an extended period before reducing the higher rate.

Credit Agreements

Credit cards usually come with cardholder agreements that outline the terms and violations of the agreement, and late payments generally are included as a violation. In turn, credit card companies have the right to assign a penalty annual percentage rate (APR) to your account for a late payment, regardless of how late it is. The APR is the yearly interest rate you pay, based on your credit card charges. A penalty APR is higher than your regular rate, and it can range from 20 to 35 percent, according to the university Extension Service in Washington, D.C.

Credit Card Act

The United States Credit Card Accountability, Responsibility and Disclosure (CARD) Act prevents creditors from raising cardholders' interest rates if their accounts are less than a year old. However, that rule doesn't apply if your payment is more than 60 days late. In any case, the Federal Reserve Board indicates that your creditor must re-evaluate any APR increases every six months and reduce your rate within 45 days of completing an evaluation if payments were made on time during the evaluation period.

Credit Card Statements

Your monthly credit card statement must indicate what your penalty interest rate could be if you miss payments, in accordance with the Credit CARD Act. Statements generally include a "Late Payment Warning" section that shows the late fee and penalty APR you could pay if your creditor doesn't receive your minimum monthly payment by the due date. The Extension Service indicates that some creditors won't apply a penalty APR to customers' accounts unless they have made consecutive late payments, but creditors aren't required to follow that practice.

Considerations

Some cardholders can set up email reminders with their creditors to avoid late payments. In such cases, creditors send notices to cardholders’ email addresses to remind them that their payment due date is approaching. Consider using this service if your card issuer offers it. Your credit card debt may grow substantially if you are hit with penalty APRs for late payments. The higher your interest rate, the longer it will take to pay off your debt.

References

• University Extension Service; What Is a Penalty APR on a Credit Card?; February 2011
• Board of Governors of the Federal Reserve System: New Credit Card Rules Effective Feb. 22
• Board of Governors of the Federal Reserve System: New Credit Card Rules Effective Aug. 22
• Bank of America: Track Your Banking Accounts With Payment Alerts