Credit Card Default and Penalty Rates Explained

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As long as you stick to the terms of your credit card and keep your card in good standing, you'll enjoy the lower interest rate. Certain mistakes, however, can trigger the default rate, an interest rate that can make it more expensive to carry a balance and harder to pay off your credit card.

What is a credit card default interest rate?

The credit card default rate, more commonly called the penalty rate, is the highest interest rate charged by a creditor or lender, usually as a penalty for becoming delinquent on payments by 60 days or more, exceeding the credit limit, or having your credit card payment returned by your bank.

Credit card default rates are commonly around 29.99%. The finance charge would be $20.54 on a $1,000 credit balance at the average default rate. Compare that to the $10.27 finance charge you'd pay on the same balance but at a much lower 15% interest rate and you'll see just how expensive the default rate can be.

If your credit card issuer increases your interest rate to the default rate, you can have it lowered in six months as long as you stick to your credit card terms. That means make your payment on time, stay within your credit limit, and always have enough money in your checking account to cover your credit card payment so that your payment isn't returned.

Depending on your credit card terms, the rate might only go back down on your existing balance. Some creditors may still apply the higher rate to new purchases made after the penalty rate became effective.

Three ways to avoid the default rate

It's not hard to avoid the default rate on your credit card balance. Follow these basic rules and you can avoid having your interest rate increased to the default rate.

  1. Make all your payments on time. If you're late on one payment, get caught up quickly because the default rate kicks in after you're 60 days delinquent, i.e. two missed payments in a row.
  2. Stay below your credit limit. While many credit card issuers have eliminated the over-the-limit fee, they haven't eliminated the default rate trigger that happens when you charge more than your limit.
  3. Make sure you have enough money in your checking account to cover your payment. Returned checks not only lead to a returned payment fee, but they also trigger the default rate.

    Thanks to the Credit CARD Act of 2009, there's no more universal default where any creditor could raise your rate to the default rate just because you were late or over the limit with another credit card.

    Credit and Loan Industry Default Rate

    A different type of default rate is used by the credit and loan industry to measure the number of credit cardholders and loan borrowers who are late on payments. This default rate considers credit cards that are past due, but haven't been charged-off or bankrupted and mortgages and auto loans that are more than three months past due.

    The default rate can be used to measure the health of the economy. Rising default rates - more borrowers being late on their credit card and loan payments - could mean the economy is experiencing difficulty. High mortgage default rates mean an increase in home foreclosures could be on the way.