Can Collection Agencies Charge High Interest?

Rules on Interest and Fees for Credit Card Debts (Philippines)

Short answer: A third-party collection agency cannot invent or hike your interest rate. It can only collect what the credit-card issuer (or a lawful assignee of your account) is entitled to under your written card agreement and under Bangko Sentral ng Pilipinas (BSP) caps and consumer-protection rules. Courts may slash “excessive” rates and penalties.

Executive snapshot

No new interest without a written stipulation. Under the Civil Code, interest isn’t due unless expressly agreed to in writing with the creditor. A collection agent is just the creditor’s agent; it has no independent right to add interest or fees on top of what the contract and law allow.
There’s a regulatory cap for credit cards. As of 2024, BSP policy caps the finance charge on unpaid credit-card balances at 3% per month (previously 2%), caps installment add-on at 1% per month, and limits the cash-advance processing fee (commonly up to ₱200 per transaction). BSP can adjust these ceilings over time.
Usury ceilings are suspended, but courts police abuse. The old Usury Law ceilings are not in force, yet the Supreme Court repeatedly reduces “unconscionable” rates and penalties.
Penalties and “collection fees” must be reasonable. Late-payment penalties, over-limit fees, and “collection” or “attorney’s” fees must be clearly disclosed in the card terms and are subject to court reduction if excessive.
Fair-collection rules apply. The Financial Consumer Protection Act (R.A. 11765), the Credit Card Industry Regulation Law (R.A. 10870), BSP regulations, and the Data Privacy Act prohibit harassment, public shaming, threats, and misuse of your data during collections.

This is general information for the Philippines and not legal advice for your specific case.

The legal building blocks

Civil Code
- Art. 1956: Interest requires a written stipulation.
- Arts. 1959–1960: No interest-on-interest (compounding) unless expressly stipulated in writing and after interest has become due.
- Arts. 1229 & 2227: Courts may reduce iniquitous or unconscionable penalties/liquidated damages.
- Art. 2209 (damages for delay): If no stipulation, courts may impose legal interest (see below).
Judicial “legal interest” (court-awarded)
- The Supreme Court (e.g., Nacar v. Gallery Frames, 2013) set 6% per annum as the legal interest for loans/forbearance and damages. This applies only through a court judgment—creditors or collectors can’t unilaterally add it if it wasn’t in your contract.
Usury Law (Act No. 2655) & CB Circular 905 (1982)
- Rate ceilings are suspended, so parties may agree on rates—but courts can still strike down or reduce “unconscionable” rates (e.g., monthly rates of 4–6% have been cut by the Supreme Court in several cases).
R.A. 10870 (Credit Card Industry Regulation Law) + BSP rules
- Requires clear disclosure of finance charges and fees; error-resolution procedures; bans unfair or abusive practices.
- BSP ceilings for credit cards: As of 2024, 3%/mo finance charge cap; 1%/mo add-on for installments; cash-advance fee capped (commonly ₱200/transaction). BSP may revise these figures.
R.A. 11765 (Financial Consumer Protection Act of 2022)
- Empowers regulators (BSP/SEC/IC) to stop abusive collection, impose sanctions, and order restitution for unreasonable fees or practices.
R.A. 3765 (Truth in Lending Act)
- Requires full, effective disclosure of finance charges (including method of computation).
R.A. 10173 (Data Privacy Act) & NPC guidance
- Limits who collectors can contact and how they process your data; prohibits public shaming, mass texts, contacting unrelated third parties for pressure, or posting your debt on social media.

Who may charge interest—and how much?

1) The credit-card issuer

Can charge only what is written in the card agreement and within BSP caps.
Typical charges (must be disclosed):
- Finance charge on unpaid balance (subject to monthly cap).
- Late-payment penalty (subject to reasonableness; courts can reduce).
- Over-limit fee (if disclosed and reasonable).
- Cash-advance fee (subject to cap).
- Installment add-on (maximum 1%/month).
- Balance transfer terms as disclosed.

2) A third-party collection agency (TPCA)

If merely collecting on behalf of the bank, it cannot:
- Change your rate, add a brand-new interest line, or impose extra “collection interest.”
- Charge you a “collection fee” unless your card contract clearly makes such a fee your obligation (and even then, only if reasonable).
If the debt is assigned/sold (the collector becomes the assignee/new creditor), it can enforce the original terms—not invent new ones—and it remains bound by BSP caps and consumer-protection laws.

3) Courts

May award 6% p.a. legal interest (from specific reckoning points) and may reduce excessive contractual interest/penalties.

What changes after default or referral to collections?

Grace period ends and finance charge accrues on the unpaid portion per contract (capped by BSP).
Penalties (late fees) can accrue as stipulated (subject to reasonableness/equitable reduction).
Compounding (interest on interest) applies only if your card terms explicitly allow it.
Attorney’s fees/collection costs: Often stipulated (e.g., “10% of amount due”) but courts frequently trim overly high figures. Outside court, a TPCA can’t force you to pay its fee unless your contract clearly says so.
No harassment: Calls, texts, or messages must be professional, truthful, and at reasonable hours; no threats, public shaming, or contacting people unrelated to your account.

When is interest “too high”?

Even with usury ceilings suspended, Philippine courts strike down or reduce rates and penalties that are “unconscionable,” such as:

Very high monthly rates (e.g., 4–6% per month or more) leading to triple-digit effective annual rates, especially when the debtor is an individual consumer.
Stacked charges (e.g., high interest and high penalty and steep “collection fees”) that collectively become oppressive.
Hidden or poorly disclosed fees.

What courts typically do:

Reduce the contractual interest to a reasonable level (sometimes to 12% or 6% p.a., depending on period/circumstances),
Reduce penalty rates/attorney’s fees to more modest levels, and
Apply 6% p.a. legal interest on amounts due from specific dates (e.g., from default, filing of case, or finality of judgment), according to Supreme Court guidelines.

Compounding & “interest-on-interest”

Not automatic. Compounding is valid only if expressly agreed in writing and interest has become due.
If your contract is silent, unpaid interest does not itself earn interest.
Many card agreements do provide for compounding via the average daily balance method; collectors can’t go beyond that method.

Attorney’s fees, “collection fees,” and other add-ons

Attorney’s fees: Valid if stipulated; courts often cut excessive percentages (double-digit add-ons are frequently reduced).
Collection fees by TPCA: Chargeable to you only if your contract says so and the amount is reasonable. Otherwise, the bank—not the borrower—bears its hired collector’s cost.
Court costs: Only recoverable if there’s a case and the court awards them.

Data privacy and fair-collection ground rules

Collectors may not:

Publicly shame you (social posts, group chats, messaging your contacts).
Threaten illegal acts, use obscene or demeaning language, or misrepresent that you’ve committed a crime.
Contact unrelated third parties to pressure you (except limited tracing with discretion).
Process or share your personal data beyond what’s necessary and lawful for collection.

You are entitled to:

Ask for the collector’s identity and their authority letter from the bank/assignee.
Request a breakdown (principal, finance charge within BSP caps, penalties, fees) and a copy of your latest Statement of Account.
Dispute errors/unauthorized charges under R.A. 10870 procedures.
File complaints with the bank’s Consumer Assistance unit, BSP (for banks), or the National Privacy Commission (for privacy violations).

Prescription (time limits to sue)

Credit-card obligations are typically based on a written contract, giving the creditor 10 years to sue from accrual of the cause of action (often from default or from a valid demand). Specific facts can shift the reckoning date.

Worked examples (for intuition)

Unpaid revolving balance with monthly compounding

Balance: ₱50,000, no payments, 3%/month (BSP cap as of 2024), compounding per contract.
- Month 1 interest: ₱50,000 × 0.03 = ₱1,500 → New balance ₱51,500
- Month 2 interest: ₱51,500 × 0.03 = ₱1,545 → New balance ₱53,045
- Total interest (2 months): ₱3,045 (no penalties included).

12-month installment with 1%/month add-on (cap)

Purchase: ₱30,000, add-on 1%/mo × 12 = 12% of principal → ₱3,600 total finance charge.
Monthly due: (₱30,000 + ₱3,600) ÷ 12 = ₱2,800.
Note: Add-on rates look low but yield a higher effective annual rate; that’s why disclosure is required.

Practical playbook if a collector demands “extra/high interest”

Ask for documents. Request (a) the authority of the collector, (b) your SOA with a computation breakdown, and (c) the applicable card terms they rely on.
Check the caps. Verify the finance charge doesn’t exceed the BSP monthly ceiling and that any installment add-on is within 1%/mo.
Spot illegal add-ons. Push back on any new “collection interest”, undisclosed fees, or double charging (e.g., interest + a separate “interest surcharge”).
Challenge penalties and attorney’s fees that look oppressive; cite your right to equitable reduction.
Propose a plan. Offer a lump-sum settlement or a restructure in writing; ask for a “full and final settlement” letter and a Certificate of Full Payment upon completion, plus update to the Credit Information Corporation.
Escalate if needed. File a complaint with the issuer’s Consumer Assistance channel; if unresolved, escalate to BSP (for banks) and to the NPC for any privacy breaches.
Keep records. Save call logs, texts, emails, screenshots, and payment proofs.

FAQs

Can a collection agency raise my interest rate because I’m delinquent? No. Only the contractual rate applies (subject to BSP cap). Agencies cannot invent a higher “collection interest.”

Can they charge me a “collection fee”? Only if your card contract clearly makes you liable for it—and even then it must be reasonable. Courts often reduce steep add-ons.

What if my card terms say 4% per month? For credit cards, the BSP monthly cap controls even if your contract says more. Any amount above the cap is unenforceable.

Is compounding automatic? No. It must be expressly provided in your contract and applied only after interest becomes due.

What happens in court? Courts may cut down high rates/penalties and impose 6% p.a. legal interest from the proper date under Supreme Court rules.

Key takeaways

Collection agencies can’t “jack up” your interest. They’re bound by your written card terms and BSP ceilings.
Unconscionable rates and penalties won’t fly. Courts have a long track record of reducing them.
Transparency is mandatory. You’re entitled to a clear breakdown and to dispute errors.
You’re protected. R.A. 10870, R.A. 11765, and the DPA curb abusive and privacy-violating tactics.

If you’d like, tell me the exact amounts, dates, and what the collector is claiming. I can run a clean calculation (with and without compounding), flag charges that exceed the caps, and draft a short reply letter you can send back.