Open Accounts: Late Charge or Finance Charge
State Statutes govern (1) adding an amount to a customers bill for late payment where credit arrangements were not made and (2) adding a finance charge where there is an agreement to extend credit. In either case, the Wisconsin Statutes require that the merchant contract for the charge. If a merchant expects to collect an additional charge, it is just as important to include that provision in the contract as the price agreed upon for the goods or services. Late payment charges are governed by Section 138.05(3), Wis. Stats. (PDF: external link), on purchases for individual, family or household purposes. Finance charges on consumer transactions are regulated by the Wisconsin Consumer Act.
LATE CHARGE OR FINANCE CHARGE - WHAT IS THE DIFFERENCE?
To obtain a charge for late payment, the customer should be given a notice or sign an agreement at the time a contractual relationship is established that payment is due by a specific date and that there is a penalty or late payment charge if payment is not received by that date. The customer does not have the right to defer payment after the due date, but agrees to pay a charge for late payment. To be considered a late charge, the merchant must treat the account as past due if payment is not made and not allow the customer to add more charges to the already past due account. The maximum rate is 1% per month, or 12% per year. A typical agreement concerning a late payment charge would be a statement on the sales slip or service agreement stating: "Payment is due within 30 days of sale. A 1% per month (12% per year) late payment fee will be assessed on any unpaid balance remaining after 30 days."
In a credit transaction a creditor and customer agree that the customer will have an extended period of time to pay an account. The customer will not be past due as long as payments are made according to the payment terms. The additional charge for the extended payments is a finance charge and specific disclosures of credit terms are required by state and federal laws. There are no interest rate limitations for credit transactions in Wisconsin.
Before the first payment is due under an open-end credit plan, a creditor must disclose to the customer, in a single written statement, various items such as:
- When finance charges begin and any period (commonly known as a grace period) in which the customer may make payment to avoid a finance charge.
- The method of determining the balance on which the finance charge will be computed.
- The method of determining the amount of the finance charge.
- The periodic rates, such as 1.5% per month, as well as the corresponding annual percentage rate of the finance charge (i.e., 18% APR)
- The minimum payment required.
- A notice regarding the customers right to dispute billing errors.
- The amount of any other charges in addition to a finance charge which may be imposed.
To be obligated to an open-end account, a customer must sign an agreement regarding the terms and must be given an exact copy of the agreement. The creditor is required to provide the customer with a statement containing specific billing information for each billing cycle.
Samples of open-end credit forms which comply with state and federal disclosure requirements can be obtained from the Department of Financial Institutions.
Any business that extends consumer credit, regardless of the annual percentage rate, is required to file an annual notification report with the Department of Financial Institutions, pursuant to Section 426.201 (PDF: external link) of the Wisconsin Statutes. See Registration Under the WCA. There are substantial penalties under the Wisconsin Consumer Act for assessing a finance charge in violation of certain provisions under the Act.