How Does Interest Work on a Debt in Collections?

If you have unpaid debt, it's important to understand how interest can increase the amount you owe. 

• Interest makes unpaid debt grow over time, and if your debt goes to collections, extra fees and higher rates can apply. 
• Fortunately, there are laws that limit how much debt collectors can add.

This article explains how interest works when a debt goes to collections, how to check your own charges, and what to do if you think you're being overcharged.

Note: These rules cover consumer debts, which are for personal, family, or household expenses. Debts related to business, work, taxes, child or spousal support, or a criminal case may have different rules. More on what is and is not a consumer debt.

When can debt collectors charge interest?

Debt collectors can only charge interest if:

Your original agreement allows it. 

• For example, when you sign up for a credit card, you agree to pay a certain interest rate, often explained in the terms and conditions.
• This agreement may also allow for the interest rate to increase under certain circumstances.

A specific law allows it. 

• If your agreement doesn't set an interest rate, Oregon law generally limits it to 9% per year.

What is an interest rate?

• An interest rate is a percentage of the total debt that is added to what you owe as a cost for borrowing money.
• The annual interest rate (also called the "annual percentage rate" or APR) is the amount of interest charged over a full year. This is often divided into monthly charges.

Debt collectors cannot add more interest or fees than what was allowed in your original agreement, unless a law specifically says they can. If a collector is charging more than you expect, they must prove their right to do so.

What to know about fees: Fees are extra charges that may be added for things like late payments or the costs of trying to collect the debt.

• In Oregon, debt collectors can charge fees only if they are clearly listed in the original agreement or allowed by law.

How does interest add up on debts?

Interest causes the total amount you owe to increase over time if you don't make payments. 

Here's an example: You owe $1,000 on a credit card with a 20% annual interest rate.

• That means if you don't pay the debt down, 20% of your total debt ($200) is added over the year.
• In the second year, your new balance is $1,200, and the 20% interest applies to that.
• So instead of going up by $200, your balance will go up that second year by $240, bringing your total to $1,440.

The longer you wait to pay, the more the debt grows. This is why debt can grow quickly and get out of hand.

How do I check if the charges are right?

1. Check your paperwork. Start by looking for copies of the original paperwork or contract related to the debt. Check for any details about the interest rate or listed fees.
2. Ask for documentation. If you don't have this paperwork, you can ask the debt collector to give you all of the details of the debt in writing. They have to tell you exactly what interest or fees they are charging and why they think they are allowed to charge them. Read how in the next section, below.

What should I do if I'm being charged too much?

If you think the charges are too high, or if you're not sure, you can ask the debt collector to explain why they believe they are allowed to charge that amount.

1. Dispute the debt in writing. Tell the debt collector in writing (in a letter or email) that you would like to dispute the debt.
2. If done quickly, they must stop collection. Try to send this letter within 30 days of when the debt collector first contacted you. If you do, they must stop trying to collect the debt until they give you the proof. If the 30 days have passed, you can still dispute the debt, but the debt collector can continue trying to collect.

Read our guide to getting more information by disputing a debt.

Where can I get help?

Contact a nonprofit credit counselor, consumer attorney, or legal aid organization for advice on dealing with excessive charges.

• Search our Legal Directory: Go here to search our legal directory for free and low-cost legal services.
• Talk to a lawyer: Contact the Oregon State Bar's Lawyer Referral Service to get connected with a lawyer who can give you a low-cost consultation. 

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