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What interest and charges can be added to my debt?

Interest is added to almost all debts, and extra charges are added to many debts if you don’t pay on time.

Interest can be charged at the same amount or it may be ‘variable’ and change over time. However your creditors can’t increase the rate of interest because you’ve missed payments.

Interest on loans can be added all at once at the start of the loan. Or a percentage may be added at intervals while you’re paying off the loan. Interest on credit cards or overdrafts is normally added monthly.

Extra charges may be added if you miss payments or you’re late paying, but your creditor can only add charges if they’re explained in your credit agreement. These charges must be fair and based on actual costs.

For example, it wouldn’t be fair to charge you £100 for a letter, even if this was included in your credit agreement, because this is a lot more than the actual cost of writing and posting a letter.

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What is APR?

Interest will be shown as the annualised percentage rate or APR. This shows how much the interest would increase the debt in a year. For example, an APR of 100% means your debt would double in a year. The higher the percentage, the more expensive it is to borrow.

If your debt is regulated by the Consumer Credit Act, you must be told the APR before you sign the agreement. This ensures you’ll know how much you’ll have to pay back.

APR is a useful way to compare the cost of different loans or cards. But remember that the total interest added also depends how long the debt takes to repay. For example, a loan at 30% APR paid back in one year would have less interest added than a loan at 10% APR over five years.

Always check your credit agreement to find out the rate of interest you’ll be charged.

Creditors often show ‘typical’ APR in their adverts. You may be charged a higher amount, for example if your credit file shows missed payments to other debts.

Stopping interest and charges on a debt

Your creditors may agree to reduce or stop interest and charges if you’re in arrears and struggling to pay. The Lending Code, which most banks and card companies follow, says they should ‘consider’ doing this, but they don’t have to. Their decision may depend on the amount you owe, how long you’ve been in arrears and how much you’re now able to pay to the debt.

In practice, most creditors stop interest and charges once your debt has defaulted, or has been passed to a debt collection agency. It’s not common for charges on a debt to continue increasing over a long time.

What should I do if I think the interest and charges are too much?

If a creditor is adding interest and charges which are more than the amounts set out in your credit agreement, you could make a complaint.

You could also make a complaint if you’ve told a creditor you’re in financial difficulties but they’re continuing to add interest and charges, making your debts increase.

Can you help get interest and charges stopped?

Your creditors are more likely to stop or reduce interest and charges if you can prove you’re in financial difficulties. We can help you put together a budget which will show what you can afford to pay to your debts. Call us our Freephone Helpline or use our online Debt Remedy tool for help.

Some debt solutions will stop interest and charges, for example an individual voluntary arrangement (IVA) in England, Wales or Northern Ireland, or a trust deed in Scotland. If one of these is suitable for you, we can help you set it up.

Other debt solutions such as a debt management plan (DMP) don’t force your creditors to stop interest and charges. If we help you set up a DMP we’ll always ask your creditors to do this. But there’s no guarantee they’ll agree.