29.99% penalties - Here we go again!

Customers of Bank of America (BOA) who miss an upcoming credit card payment may be in for a huge and unpleasant surprise. Starting June 25^th, BOA could raise penalty rates to 29.99%. The higher rate will apply to new purchases only, as old purchases have protection from rate increases under the Credit CARD Act of 2009.

Preparation

The rate increase, however, is not something that BOA is just springing on its customers. In fact, it is something the bank has been preparing bank customers for since April. It is also important for BOA account holders to understand that the higher interest rate is a penalty rate that is triggered by a late payment. The higher rate does not become the overall interest rate that the cardholder will be paying on existing balances. The penalty APR is an option the bank may choose to impose on the account, although it is not mandatory. The bank has discretion regarding these penalty APRs and it is possible that it would not be triggered the first time a client is late with his payment. The cardholder’s payment history will be taken into account and analyzed.

Notification

Notification of the penalty APR won’t happen overnight either. Customers will be notified at least 45 days before the rate increase occurs.

When BOA customers make a late payment, the penalty APR may not be the only consequence they face. The bank may also charge a fee of up to $25 as a late fee. For repeat offenders, such as those that make two late payments within a six month period, the late fee may be as high as $35.

The Irony

The fact that BOA will be charging a 29.99% penalty APR is within industry standards, with the rate typically exceeding 20%. The irony of the story is that BOA eliminated the penalty APR in 2010 in order to comply with the new credit card laws. The penalty fee at that time applied to both new purchases and existing balances. Today, banks cannot charge the penalty APR to the entire balance unless the account is 60 days past due.

Doug Nicholas

Doug Nicholas, a financial consultant by profession with a Masters degree in International Business from Brown University, is also an ardent writer. Though he has a full time job at one of the companies listed on Wall Street, he does manage to squeeze in time to follow his passion. He puts his ideas to words in his articles related to finance and business.