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Reining in interest rates

Hey Thea,
What interest rate can I charge on an account?
Thanks,
Color Me Interested

Dear Interesting Color,
That has got to be the absolute shortest question I have received in all the years I have been writing this column. I would love to give you an equally short and straightforward response, but alas, as with all things credit and collection, it is not that simple and it is not my style. My head would literally explode.

I assume we are talking about what interest rate to put on your credit application as part of your terms and conditions. Most companies stick with a 1.5%, some are 2% or 24% annum. The real issue here is usury laws. If you are not familiar with usury laws, settle in—we’re just getting started. You cannot charge more than is legally allowed in your state. If you are multi-state, it gets a little more complicated but not impossible to maneuver.

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Usury laws are primarily state-by-state with more than half, as of the date of this column, having usury laws in place, and each dictates its own maximum legal limit. Ironically, this does not apply to most credit cards thanks to aggressive deregulation that kicked off in the 1970s. Apparently, it is ok to do legal loan sharking if you are a
credit card company. There are some federal laws, but we are keeping it simple.

All that usury law fun is why most credit applications in our industry stick to the 1.5% or 18% annum, adding the verbiage, “or the highest amount allowed by law,” to keep from running afoul of this issue. For a more precise answer, look at the usury laws and rates in your state or the states you do business in, gather your information, then call your attorney and ask if your interpretation and choice of rate keeps you legal. Or you can skip the self-education step and just call your attorney for the short down-and-dirty answer.

If you violate usury laws, the penalties are all over the board from a slap on the wrist, having to return all the interest collected—usually with some additional fees piled on to make it painful—or jail time, in some cases a felony charge and possible imprisonment of up to 5 years. It depends on if you “willingly or knowingly” did it. That is a little vague for me, but I don’t make law.

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Moving past the amount you can charge, let’s chat about when you can charge. You can’t charge what you don’t disclose. Meaning just because an account went tragically past due and they are blatantly ignoring your requests to be paid, doesn’t mean you can slap down interest charges on said joker.

You are required to disclose these types of charges prior to charging them. The customer has to be aware and have agreed to those interest fees. All the more reason to have them in your terms and conditions on your credit application and on your bill of lading or delivery tickets.

If you don’t obtain the blessing and have to go the collection or litigation route to collect your past due account, the collection agency, in most cases, will not be able to add interest to the debt, and your attorney can ask for pre- and post-judgment interest but it will be up the judge’s discretion to grant it or not.

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Back to your super short question with a super short answer: Sure. You can do anything you like. You just aren’t free of the consequences. Welcome to adulting.

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