Friday, November 2, 2012

Can a Collection Agency Charge Fees and Interest?

It isn't uncommon for a person to owe a debt for a certain amount only to find that amount has increased significantly after the account goes into collections. Just because a debt collection practice is common, however, that doesn't mean its legal. Collection agencies can only add fees and interest charges to your debt under very specific circumstances.

What the Law Says About Collection Fees and Interest Charges

Many consumers are under the mistaken impression that federal law prohibits a collection agency from demanding fees and interest charges from the debtor. This isn't always the case. Let's take a look at Section 808 of the Fair Debt Collection Practices Act, which details collection practices that are a violation of federal law:

"The collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law. "

We can see here that a collection agency cannot arbitrarily decide to charge you a random fee just to pad its profit margin. Nor can it have a policy of charging fees for the same ridiculous reasons that debt settlement companies do, such as charging a fee to set up or update your account information.

Collection Agencies and Interest Charges 

We know that debt collectors cannot charge arbitrary fees, but that doesn't mean that they can't charge fees at all. A collection agency's right to tack on additional charges to your debt depends on the agreement you signed with the debt's original creditor.

If you're like most Americans, you probably don't read the fine print when you apply for a loan or credit card, or use financing to obtain goods and services. The fine print, however, almost always addresses how much – if anything – debt collectors can add to your debt.

Take credit cards for example. Credit card account agreements sometimes stipulate that interest will continue to accrue should the account fall into collections. This means, simply, that when you don't pay your credit card debt and the credit card company charges it off, the collection agency that receives the debt will pick up right where the credit card company left off – charging you interest.

Credit cards often pass collection fees on to you.

As illogical as it may seem (because, lets face it, if you couldn't pay the original debt, odds are there's no way you're going to be able to afford an even higher amount), this practice benefits both the creditor and the debt collector. If the creditor hired the collector on a contingency, the collection agency receives a percentage of the amount it collects. The higher the debt, the higher the amount the credit card company recovers and the higher the debt collector's profit. A higher debt also ensures that a debt collector can offer you a debt settlement without losing money.

General Debt Collection Fees

Collection agencies don't collect debt out of the goodness of their hearts. Quite the contrary. Creditors pay dearly for the service. Well....they used to. Recently more and more creditors are including provisions in their contracts with consumers stating that, should the debtor default, the debtor will be responsible for paying the total cost of collection. Just look at this snippet from Capital One's cardholder agreement:

"You must pay us all of our collection expenses, attorneys’ 
fees, and court costs unless the law does not allow us to 
collect these amounts. "

By passing the debt on to the consumer, creditors can save money and further increase their profit margins. Unfortunately, this also means that you may end up owing a much higher debt to the collection agency than you did to the original creditor.

Related Posts: 

Bill Collectors Demanding the Wrong Amount

Improving Credit Scores After Collections


  1. Hi Lee,

    I find myself turning to your blogs in a time where I am getting ready to apply for a mortgage. From what I understand, you cannot qualify if your credit is not above 630. I am around 607. My credit report as i just read it is actually very positive except for 1 negative of $377. My debt to income is good and on the "risk scale" for lenders it was 2 out of 10. So I am afraid the one negative mark is severely hampering my score. Am I right in assuming that? and from what I understand you say that just paying it will not improve my score. Is there anything I can do? I am working on getting my credit card down to 5%-9% like you suggested. But is there anything i can do directly related to the $377 in collections? I asked Midland Credit Management about PFD but as expected was turned away. I feel stuck with this score and need a home! ahhh!

    Any feedback would be greatly appreciated.
    Best to you,

  2. Jason,
    You have several options. I talked to a mortgage broker about six months ago who informed me that, for FHA, anything above 620 is good to go. Now this can vary by bank but you should know that you have options. Your score isn't terrible. In this post-economic apocalypse, scores are lower than ever. I would not be surprised to see the new "normal" drop yet again. Call some mortgage companies and just ask. Don't let them run your credit, but see what they say. You never know.

    Worst case scenario here is that your mortgage company will require you to pay off the collection before approving your loan. Now, I'd rather eat southern fried rat than see anyone pay off Midland. :) But you do what you have to do to get your mortgage.

    You don't say how old your collection is, but you need to watch out for reaging. The collection should fall off your report at the same time the original creditor's negative report does. You say this is the only negative on your report and that doesn't sound right. If the OC has already been removed, Midland should be gone as well.

    Long story short, as long as you have a credit history that illustrates a good management of both revolving and installment debt and it spans at least seven years, I don't see a single collection being an unmovable obstacle between you and your new home. Keep us updated.

    1. Let me extrapolate on that: For anyone reading this in Jason's situation, I don't see a single collection of $377 standing between you and a mortgage. If the collection was in the thousands, then you might have a problem.

  3. Hi Lee,

    I have a collection of 890 from a collection agency. I know my score is over 630. Now, my situation with the creditor has been a battle. I signed a contract for my child (yes first mistake a new parent makes) for karate america. Long story short, the balance sent to the collections agency was 2100. I paid 100 to them and then paid the remaining balance. The collections agency actually tacked on their own fees of over 890.00. I understand you stated they could take on late fees from the contract that was given to them. I do not owe the 800 for the remainder of the contract. I can understand if they are trying to get a couple hundred from me for their fees, but 890.00 is not what I owe. Once they stated they would take off 400 off of it, and then recanted the next time I called to get a balance statement. They will also not send me a balance statement detailing charges and payments on the collection. They say it's against policy. Any advice or should I just wait 5 more years to request to get it off my credit?

    1. Check your original contract with Karate America to see if it allows for the collection of fees or interest on overdue accounts. If it does not, a third-party collector has no right to tack on these fees for its own benefit. After all, its already getting paid a commission to collect. Knowing with collection agency you are working with would be helpful. If you get a settlement offer, make sure to get a written copy of the offer emailed or faxed to you, on company letterhead, while you are still on the phone. Otherwise, the previous offer may vanish--especially if your case is managed by whoever happens to be on duty and not a specific collector.

  4. I am in the process of slowly rebuilding my credit after years of destroying it. Most of my really old items are beginning to fall off and in the last two and half years my score has gone from 541 to 607. Currently, I have some collection accounts that are listed as "last activity 2009" but the account opened dates vary from 2009 to 2013...I have been very evasive with my phone number as to keep from annoying collection calls, however now I find myself not recognizing which collection company owns which original debt...its very frustrating and leaves me twiddling my thumbs for any written communication. And now I have one balance creeping up, a few dollars here and there (I am currently enrolled in score watch with How do I know if this is a legitimate fee they are adding? If it is for the account I think it is for, I signed my credit card agreement in 2004 and the original creditor was sold to Bank of America in 2007-08, after which was charged off in 2009. Since the original holder of the agreement was bought out, and then it was charged off and sold to at least 2 different collection agencies that I know of, and it has been almost 10 years, who knows what the original agreement said? I realize how confusing this sounds, but I would appreciate any help in trying to figure out whether or not I can help the fact that they keep raising the balance on an account that hasn't been "active" in over 3 years. Thank you!

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  6. Unless the collector is using sewer service you should have notice a collector wants to go to court. In Illinois which has exemptions, the bank account would be declared before the judgement goes into effect.
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  7. Hi Lee,

    I recently received a letter from a collector regarding a debt has been assigned to them from CBA. I've checked with my bank and found out they have sold this credit card debt in 2009 with an original amount of $1227. However, the bank couldn't find further information in their record back to 2009 because it was too old.

    I've requested a full stalemate from the collector, the outstanding amount is $4405 which is 3 times of the original debt with interest and late fees accumulating every month since 2009. Is there any policy to control the collector on the rate that they can charge?

    I'm stuck and depressed in receiving this big amount of debt out of a sudden. Any advice would be greatly appreciated.