Understanding Credit Cards: Credit Card Penalties

by Amy Lillard

Credit and credit cards are an integral part of our economic system today. But there is a lot of misinformation and misunderstandings about credit. In this continuing series, we examine key concepts, tips and best practices when it comes to credit cards.

(12/12/2012) Consumers that work hard to use credit cards to their advantage, and to keep their credit record clear and positive, can find the byzantine mix of credit card penalties frustrating. For any customer, penalties can be confusing and ultimately dangerous to credit.

Some penalties, while painful, do make sense. Credit card companies will charge fees n the following cases:

• Late fees. Typically, if a customer is late with a payment, or pays an incomplete amount, credit card companies will charge a late fee. This type of penalty will appear on a credit report either temporarily or permanently, depending on the creditor, so it pays to be aware and on time.

• Limit fees. If you overstretch your credit limit, you will incur a fee. Again, this can appear on a credit report, so watch your limits.

The biggest penalty can occur in addition to these fees, and have long-lasting impact. Credit card companies may increase the interest rate on your card to more than 30 percent in cases of late payment, spending over the limit, and other no-no's. This penalty annual percentage rate (APR) is usually much higher than the regular interest rate on your account, and can be applied until you make at least six consecutive months of payments or longer depending on the creditor.

The details around the increased rate are usually buried within a credit card user agreement and statements, so it can often hit credit card users by surprise. And that means it can go unnoticed, building up the ultimate amount of debt that customers owe over time.

To avoid these situations:

• Pay at least the minimum payment on time, every time. If you feel you can't make a payment, contact your credit card immediately to discuss alternatives or options.

• Stay under your limit. Know how much credit you have and stay within that window. Even better, stay under 25 percent utilization to keep an optimal credit score

• Don't bounce a check. Penalties can occur if you accidentally or on purpose try to pay with insufficient funds.

For Additional Reading:

Bank Fees Continue to Rise: http://www.nerdwallet.com/blog/2011/bank-fees-rise-penalty-apr/

Penalty/Default APR: http://www.cardhub.com/edu/default-interest-rate/

Basic Facts about Credit Card Rates: http://learn.bankofamerica.com/articles/managing-credit/basic-facts-about-credit-card-rates.html