You owe $500 to your credit card company. Unfortunately, an unexpected job loss leaves you stretching pennies just to pay your mortgage and car payment. Your credit card payments fall to the wayside while you fervently struggle to stay afloat financially.
After six months, you've found a more stable job and can begin paying off debts that accrued during your brief period of unemployment. You discover that your credit card company charged off your account and, to your shock, bill collectors are now demanding that you pay $750 toward the defaulted credit card debt.
Additional Charges From a Collection Agency
Every month that you carry a balance on your credit card, the credit card company charges you interest and adds the interest charges to your total debt load. Credit card providers close debtors' accounts when they charge off the debt and send it to collections – but interest continues to add up.
The Fair Debt Collection Practices Act makes it illegal for a collection agency to charge interest on most types of debt. If the debt you owe is a credit card debt, however, the rules change somewhat. Because all credit card companies charge interest, the agreement you signed contained written notification that interest charges would make up a portion of each bill. When the original creditor's contract contains a provision for interest charges, any collection agency that subsequently buys the debt also has the right to collect interest.
Defaulted Credit Card Debt Increases Exponentially
Most people who make small purchases on their credit cards and pay off the balance in full each month don't struggle with their interest charges. Once you start missing payments, however, the trouble really begins. Each payment you miss leaves you facing a late fee from your credit card company. Credit card company late fees cannot exceed $25, but miss your payment for four months in a row and you suddenly owe an additional $100.
As your debt grows through late charges, interest is steadily being added to your debt. The more you owe, the greater the monthly interest charges – resulting in your defaulted credit card debt steadily climbing out of control.
Collection Fees Contribute to High Debts
Bill collectors aren't just charging you interest on your credit card debt – they're also adding fees of their own to pad the company's profits. Just like the ability to charge interest, collection agencies also possess the right to add their own fees to your unpaid balance if the original creditor's contract included a provision for collection fees – which almost every new credit card agreement does.
What to Do When Bill Collectors Are Wrong
There are many ways your unpaid credit card debt can grow both before and after the original creditor sells it to a collection agency. In some cases, however, the collection agency simply made an error. Don't expect bill collectors to take you seriously or investigate the issue upon being informed over the phone that the amount of the debt is incorrect. A debt collector will see this as just another excuse from a consumer who doesn't want to satisfy his or her financial obligations.
Rather than duking it out with a bill collector over the phone, send the collection agency a debt validation letter. I'm not going to go into depth about debt validation letters here since I covered that topic in a previous blog post (What is Debt Validation?), but you can demand in your debt validation letter that the collection agency inform you of how it arrived at the amount it claims you owe. Even if you know the debt belongs to you, you still have the right to demand validation from a bill collector – especially if you suspect the company is demanding the wrong amount.