If you are looking to get your first credit card or you are having difficulty managing your credit card payments, then you should definitely be aware of credit card penalty interest rates, also known as a default interest rate. Interest resulting from late or missed payments is a huge source of profit for banks.

Fortunately for consumers, the CARD Act of 2009 requires issuers to be much more upfront about the fees and interest they charge and puts some restrictions on how these penalty rates are imposed. If you are late with a payment, the rate can only charged on new transactions. On the other hand, if you are more than sixty days behind in payments, the penalty rate can be applied to your existing balance, as well as, new transactions. You may be able to get the rate to go back down if you make on time payments of the minimum amount or more for the first six months after the new rate has taken effect. If you forget to sign your payment check or the check bounces, this will count as a late payment too. With a bounced check, you’ll also incur a returned check fee.

Be sure to read your credit card agreement where the penalty interest rate will be stated. For some credit cards, these interest rates can easily be 30% or more. There is no federal law limiting the interest rate, but the maximum rate is typically set by state regulation. Note that the law in the state where the issuer is headquartered applies regardless of where you live. Naturally, issuers choose to locate, when possible, to states that have a high cap on interest rates or no cap at all. The exception is with credit unions which are regulated separately from banks by the National Credit Union Administration (NCUA). The Federal Credit Union Act caps the interest that a credit union can charge at 15%, but the NCUA can override this and currently has the maximum set to 18%. This cap will be in effect until September of 2015 when the NCUA will review rates again. Still, the credit union interest rates are a much better deal than you can get from a bank or other credit card issuer.

Not all issuers impose a penalty rate, choosing to assess a late payment fee instead. For instance, the Discover It card does not have a penalty interest rate and doesn’t charge a late fee for the first late payment. For additional late payments, a $35 fee is charged.

Keep the above tips in mind when managing your finances. The bottom line is that what interest rate issuers are allowed to charge can be confusing. It is important to read the credit card agreement when you first get your card and the revisions that you will typically receive annually so that you are not caught unawares. If you are careful, then a credit card can be a useful in expanding your financial reach, but if you stop paying your credit card bill, your debt will quickly spiral out of control.

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