Bank of America's New Credit Card Penalty Interest Rate Is Nearly 30%

Bank of America credit card holders, beware. If you're late on a monthly payment, that little "oops" might become a big "ouch": Your future balances could be subject to a penalty rate of nearly 30%, notes a report Wednesday in The Charlotte Observer. The penalty rate will not be applied to previous balances, however.

Nor will the penalty interest rate be applied automatically, the article notes, but rather on a case-by-case basis after other risk factors are considered. And, if the bank does chose to hit an account with the penalty rate hike, it will give the customer a 45-day heads up before the new rate goes into effect, as required under 2009's Credit Card Accountability, Responsibility and Disclosure Act, otherwise known as the CARD Act. Bank of America (BAC) began notifying customers about the penalty rate increase via their bills this month: Those who are affected soonest will see their rate increase coming afterJune 25.

The penalty interest rate can scale up to a maximum of 29.99% on future balances, and card holders will have their accounts reviewed every six months as required by the CARD Act for potential reductions in the penalty rate, BofA spokeswoman Betty Riess told DailyFinance.

Before the CARD Act went into effect, consumers faced an interest rate death spiral with their credit cards, Greg McBride, a senior financial analyst with Bankrate.com, told DailyFinance.

"Prior to the CARD Act, penalty interest rate increases were a one-way ticket," says McBride. "Now, they have to review them every six months. And while the requirements are still kind of loose, it's a step in the right direction."

He added another major change that came out of the CARD Act is that any penalty interest rate increases can only be applied toward future credit card balances and not existing balances, unless the payment is delinquent by more than 60 days.

The bank's adoption of a penalty rate follows a path that other financial institutions have taken since the late 1990s, according to a CreditCards.com report. Back in 1998, for example, the average default rate hovered at 22.75% and remained in a relatively tight range in the years that followed, reaching as high as 25.28% in 2009. But despite the passage of the CARD Act, penalty interest rates have continued to climb.

Last summer, banks were charging an average median penalty interest rate of 29.99%, according to a BankRate.com report. That puts Bank of America squarely in the middle of the pack with its competitors. If it's any consolation to their customers, CreditCards.com noted last year that HSBC's penalty rate had exceeded the 30% threshold -- topping out at 31.99%.

To avoid those penalty interest rates, credit card users simply need to make payments on time, advises McBride.

Says McBride: "People complain about the penalty interest like they complain about speeding tickets. If you don't want the ticket, then don't speed."