Fine print, Living with credit

Citi’s fee refund puts spotlight on penalty charges

Kelly Dilworth

Citi’s decision to voluntarily refund more than $330 million in fees to cardholders has penalty rates back in the news, but the fact is, you can avoid high interest rates and late fees that are triggered when you don’t pay at least the minimum amount due.

First, though, what are penalty rates and how did Citi’s action spotlight a rarely discussed CARD Act rule that limits how much and for how long lenders can charge penalty rates?


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Penalty rates are high interest rates charged by the credit card issuer when a borrower violates the card’s terms and conditions. The penalty rate is triggered most often when cardholders are late making monthly payments.

However, under the Credit CARD Act of 2009, if you pay six consecutive bills on time after being hit with a penalty rate, lenders are supposed to go back to charging your old APR – at least for balances you incurred before you fell behind on payments. Any new charges you make can be charged a higher APR.

Also under the CARD Act, card issuers have to wait until you’ve been late for at least 60 days before it can sting you with a penalty rate.

Citi, after completing an internal review, found that it was charging some customers a penalty rate long after they paid six bills on time in a row. Other customers received a rate reduction, but they still were being charged too much.

Citi’s mistake highlighted just how important it is to read your terms and conditions and to monitor your bank charges. Many of the people affected probably had no idea that they were being overcharged.

How penalty rates and late fees add up

Penalty rates are deeply damaging for cardholders. A penalty APR can run as high as 29.99 percent – nearly twice the average credit card APR of 16.41 percent, according to CreditCards.com’s Weekly Rate Report.

Late fees that accompany penalty rates are also getting steeper, making it costlier to fall behind on payments. The CARD Act caps how much lenders can charge when you miss a payment, but that cap rises with inflation. As a result, late fees have risen from a maximum of $25 in 2011 to $38 in 2018.

Thankfully, with passage of the CARD Act, penalty charges aren’t nearly as common as they used to be.

A few credit card issuers have ditched penalty rates altogether and are forgiving at least some late payments. Discover, for example, doesn’t charge penalty rates on its cards and doesn’t charge a late fee the first time you fall behind.

Meanwhile, the Citi Simplicity card waives both penalty fees and late fees, as does the no annual fee Pentagon Federal Credit Union Promise card.

Plain vanilla cards that are marketed as “low interest credit cards” and don’t offer a rewards program are among the likeliest cards not to charge a penalty rate. For example, the BankAmericard Mastercard doesn’t charge a penalty rate. Neither does the Chase Slate card, which stopped charging a penalty APR in 2015.

According to a CreditCards.com review of more than 100 basic, no-frills credit cards, most plain vanilla cards don’t charge any kind of penalty rate.

How to avoid penalty rates and late fees

Here are three things you can do to avoid or limit late payment charges and penalty rates:

1. Steer clear of credit cards that charge a penalty.

If you think there’s a sliver of a chance you might miss more than one bill, then stick with cards that won’t raise your rates if you can’t send the minimum payment.

Also, look for low interest rate credit cards that don’t charge any kind of penalty, including default APRs and late fees.

2. If you are hit with a penalty rate, focus on paying down debt.

The quickest way to end penalty charges is to diligently pay your bills on time and avoid adding any new charges. If you pay on time six months in a row, the penalty rate should reset to the lower rate for your old balances.

But a bank could still surprise you with a higher rate on new charges, which aren’t subject to the CARD Act’s six on-time payments rule. To find out whether your bank will keep charging a penalty on new purchases, you’ll have to check your card’s terms and conditions.

3. Regularly monitor your credit card charges.

Mistakes happen. Regularly scan your credit card statements so you aren’t charged more than you owe. Citi did the right thing by voluntarily returning cardholders’ money, but the incident underscored how lenders can make big mistakes that are costly for consumers.

Finally, scan your finances to see if there’s any way you can scratch up enough cash to pay at least the minimum amount due on your credit cards. Sending the minimum avoids late fees.

Many people who are tight on funds tend to ditch their credit card bills first so that they can make payments on other loans, but that’s generally a bad strategy. If you’re struggling to pay your credit cards now, then you’ll really have a hard time once your rates are jacked up to nearly 30 percent.

See related: 9 strategies to win the credit card payments gameAs credit card rewards increase, so do the risks for cardholders

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