Yes, a creditor can charge interest on a charged-off account. A charge-off is an accounting move the lender makes on its own books once an account is seriously delinquent; it isn’t a release of the debt or an amendment of your credit agreement. The contract you signed authorized interest on any unpaid balance, and that authorization keeps running after the charge-off unless the agreement says otherwise or a law steps in to limit it.
What a Charge-Off Is, and What It Isn’t
Federal banking regulators require creditors to reclassify a delinquent open-end account, such as a credit card, from an asset to a loss once it hits 180 days past due.1FDIC. Revised Policy for Classifying Retail Credits That reclassification is what a charge-off is. It tells the creditor’s accountants and shareholders that the balance is unlikely to be collected. It does not tell you the debt is forgiven.
The creditor keeps every legal right it had before: to demand payment, to report the account to the credit bureaus, to sue, and to sell the debt to a third party. It also keeps the contractual right to add interest, because nothing in the accounting entry touches the underlying agreement.
Why Some Creditors Stop Adding Interest Anyway
You may notice that the balance on a charged-off account sometimes freezes. That’s usually a business decision, not a legal requirement. Under Regulation Z, a creditor that charges off an account and stops adding fees or interest is exempt from sending periodic statements.2eCFR. 12 CFR 1026.5 – General Disclosure Requirements A creditor that keeps charging interest has to keep mailing statements, which costs money on an account it already treats as a loss. Many decide it isn’t worth it and freeze the balance. Others don’t.
State Usury Caps and the National Bank Exception
State usury laws cap the maximum interest a lender can charge, and the caps vary widely by state and loan type.3Conference of State Bank Supervisors. CSBS Releases Comprehensive State Usury Rate Tool Those caps often don’t help credit card borrowers, because national banks can “export” the interest rate laws of their home state under Section 85 of the National Bank Act.4Congress.gov. Federal Banking Regulator Finalizes Rule on State Usury Laws A rate that was legal when the bank set it up doesn’t become illegal just because the account was later charged off.
The harder question is what happens when the bank sells the debt.
When a Debt Buyer Owns the Account
Most charged-off credit card debt ends up sold to a third-party debt buyer. The buyer generally inherits the contract rights the original creditor had, including the right to collect interest at the contract rate. Whether the buyer also inherits the bank’s power to override state usury caps is unsettled.
In 2015, the Second Circuit held in Madden v. Midland Funding that a non-bank debt buyer could not shelter behind the National Bank Act’s rate-exportation power, opening the door for borrowers in low-cap states to challenge the interest a debt buyer was charging. The OCC and FDIC responded in 2020 with “valid-when-made” rules, codifying the idea that a rate legal at origination stays legal for anyone who later owns the loan.4Congress.gov. Federal Banking Regulator Finalizes Rule on State Usury Laws Those rules survived early challenges under an agency-deference standard the Supreme Court then eliminated in Loper Bright Enterprises v. Raimondo in 2024. Debt buyers still rely on the rules, but a court could now find they exceed the agencies’ authority. If a debt buyer is charging you a rate that would exceed your state’s usury cap, that legal uncertainty is real, and it can be leverage.
Separately, the Fair Debt Collection Practices Act bars a collector from collecting any interest, fee, or charge unless the original agreement authorizes it or state law permits it.5Office of the Law Revision Counsel. 15 USC 1692f – Unfair Practices A collector that adds interest with no basis in the contract or state law is violating federal law regardless of what the usury debate looks like.
How to Challenge Interest Added by a Collector
Within five days of first contacting you, a debt collector has to send a written validation notice with the amount owed and the name of the creditor.6Office of the Law Revision Counsel. 15 USC 1692g – Validation of Debts You have 30 days from that notice to dispute the debt in writing, and if you do, the collector must stop collecting until it verifies the debt.
When interest has been added to a charged-off balance, disputing forces the collector to show its math: the original balance, the interest added, and the legal basis for that interest. If the collector can’t point to a contract term or state law that supports the added amount, the FDCPA’s prohibition on unauthorized charges applies.5Office of the Law Revision Counsel. 15 USC 1692f – Unfair Practices
You can file a complaint with the Consumer Financial Protection Bureau or sue the collector. A successful FDCPA claim can bring statutory damages of up to $1,000 per case plus attorney’s fees, which is why some consumer lawyers take these cases on contingency.
Watch the Statute of Limitations Before You Pay
Interest accruing on paper is one thing. The creditor’s ability to sue you for it is another. Every state sets a statute of limitations for consumer debt, generally somewhere between three and ten years. Once that window closes, the creditor or debt buyer loses the right to sue, though the debt itself still exists.
Here’s the trap. In many states, making even a small payment on an old charged-off debt restarts the clock. A $25 good-faith payment can revive a lawsuit that was otherwise time-barred. Before paying anything on old charged-off debt, including any accrued interest, check your state’s statute of limitations and whether a payment resets it. A collector who sues on a time-barred debt may be violating the FDCPA, but you have to raise the defense in court yourself.
Interest Is Usually the Most Negotiable Part
Accrued interest on a charged-off account is often where a settlement gets built. Creditors and debt buyers know some recovery beats none, and lump-sum settlements in the range of 30% to 50% of the balance are common. The age of the debt, whether the original creditor or a debt buyer holds it, and how close the statute of limitations is to expiring all move that figure.
Debt buyers paid a fraction of face value for the account, so even a modest settlement is profit for them. That’s useful context when a buyer is stacking interest on top of a balance it bought at a steep discount. Get any settlement in writing before you send money, and make sure the agreement says the payment resolves the entire debt, including accrued interest and fees.
If the Creditor Gets a Judgment
Interest doesn’t stop if a creditor sues and wins. The court applies a post-judgment interest rate to the amount you owe under the judgment. In federal court that rate is tied to the weekly average one-year Treasury yield.7United States Courts. 28 USC 1961 – Post Judgment Interest Rates State courts set their own judgment rates. The judgment rate replaces the contract rate, so depending on the state it may be higher or lower than what was accruing on the charged-off account. A judgment also generally extends the collection timeline well past the original statute of limitations, and in most states it can be renewed.