How does interest work on debt that has gone to collections?

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Many debts have an interest rate, which means that a certain amount gets added to what you owe until you have paid the debt off. 

If your unpaid debt goes to a collection agency, that interest can keep building up—sometimes at a higher rate than before. But there are rules that limit the interest and fees that debt collectors can charge.

This article explains how interest works on debt, and how to learn more about your own debt protect your rights if you're facing extra charges. Understanding these rules can help you make sure you aren't being overcharged.

When can debt collectors charge interest?

Debt collectors can only charge interest if:

1. The original agreement or contract allows it.
   • For instance, when you sign up for a credit card, you agree to pay a certain interest rate. This rate is often explained in the paperwork you sign or the online terms you click "agree" to. 
   • That paperwork can allow for the interest rate to increase, meaning the debt collector can charge more interest than you were paying before.
2. Some law specifically allows them to add more interest.
   • If your agreement doesn't set an interest rate, the law in Oregon usually limits it to 9% per year.

How does interest add up on debts?

When a debt has an interest rate, it means the total amount you owe increases over time if you don't pay.

For example: A credit card debt of $1,000 with a 20% annual interest rate (sometimes called the "APR") will go up by $200 in interest in one year.

• This means that if you have a credit card bill of $1,000 and make no payments for a year, you will owe $1,200 after 12 months.
• In the second year, if you still haven't made any payments, your credit card balance is now $1,200. 
• The 20% interest rate would apply to the new balance of $1,200. So instead of going up by $200, your balance will go up by $240 that second year, bringing your total to $1,440.
• And so on, until the balance is paid. 

The longer you wait to pay, the more the debt grows.

Debt collectors cannot add interest or fees beyond what was allowed in your original agreement unless there is a law that specifically allows it.

• If a collector is charging more than you expect, they must prove their right to do so.
• Debt collectors must give you an itemized statement of how they calculated the total debt, including any interest or fees. 

How do I find out more about my debt?

1. Check your paperwork. First, check whether you have copies of the original paperwork or contract related to the debt, and look for any information about the interest rate.
2. Ask for documentation. If you don't have this paperwork, you can ask the debt collector for all of the details of the debt in writing. This must include any interest or fees they are charging and why they think they are authorized to charge them. 

//Go here to learn more about dealing with debt collectors, including how to request this information.

Visit this page by the Consumer Financial Protection Bureau, a federal government agency, to find more information and to download sample letters for communicating with debt collectors. 

What should I do if I think the charges are wrong?

If the charges seem unfair or unauthorized, you can dispute them in writing.

1. Tell the debt collector in writing (in a letter or email) that you would like to dispute the debt.
2. If you do this within 30 days of when the debt collector first contacted you about the debt, they must stop all attempts to collect until they verify the debt and give you proof.
3. You can still dispute a debt after the 30-day period has passed, but the debt collector can continue collection efforts while they investigate your dispute.

//Go here to learn more about how to challenge or dispute a debt in collections.

Where to 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.