There are few "gotcha's" in today's post-credit-reform world, but the one that remains is a doozy. If you fail to make your credit card payments on time, it can cost you dearly. Not only does the typical bank nick you with a $35 late payment fee each month you've failed to make the payment by the due date, they're allowed to hike the interest rate on your entire balance to a "penalty rate" if you're more than 60 days in arrears.
For the average person who carries a $4,000 balance, the penalty interest rate will cost $665 annually, according to an analysis by CreditCards.com. Add the late fees and the total cost of this transgression adds to more than $700.
On the bright side, CreditCards.com's survey of 100 U.S. credit card issuers found that penalty rates have dropped slightly to an average of 28.45 percent from 28.60 percent and fewer credit card companies automatically impose penalty rates. Before the Credit Card Act passed in 2009, 91 percent of banks charged penalty rates, which hike interest charges on your entire outstanding balance -- not just the charges made after the missed payments. In 2012, the percentage of banks imposing penalty rates dropped to 69 percent and it's now down to 60 percent.
That said, the average consumer who carries a balance pays an interest rate of just 11.82 percent, so paying the average penalty rate will hike the interest charge by more than 16 percentage points annually. The law requires lenders to lift the penalty rate after the consumer has made 6 months of on-time payments, however you may have to remind the card issuer to comply.
It's worth noting that part of the decline in average penalty rates is likely due to today's favorable interest rate environment. Of the surveyed cards, 28 percent calculate the penalty rate based on a variable formula that adds a set number of percentage points to the prime rate. (Prime plus 20 percentage points, for instance.) Another 32 percent of the issuers figure the penalty rate based on the consumer's creditworthiness.
The remaining 40 percent of surveyed issuers have a set penalty rate. According to the survey, the lowest penalty rate was 17.99 percent imposed by the Pentagon Federal Credit Union.
Correction: The Barclays NFL Extra Points card was erroneously listed at the card with the highest penalty rate. The card does not impose penalty rates. Consumer interest rates are set at the outset, ranging between 14.99 percent and 24.99 percent, depending on the consumers credit.