What Is a Chargeback?

What Is a Chargeback? article image.

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While most purchases go through without a hitch, every once in a while you may have to deal with a transaction gone wrong. It could be a mechanic who charges you for work but doesn't fix your car, a restaurant server who adds a little something extra to their tip, or an order you placed online and never received. In another case, you might notice new purchases on your credit card account that you're certain you never made.

A chargeback is a way to get your money back when merchants aren't following through on their promises or you're charged for something you didn't buy. It can alleviate some of the frustration and keep you from paying for fraudulent purchases.

What's the Difference Between a Chargeback and a Refund?

If you're unhappy with a purchase, your first move should generally be to contact the store and ask for a refund. You may be able to get your money back by showing your receipt and returning the product, or explaining why you want a refund—perhaps the product was broken when you opened the box or you never received the shipment.

Stores' return policies can vary, but sometimes you don't even need a receipt to ask for a refund. Also, you might get a refund back onto your card, as cash or as store credit depending on the merchant's policies.

A chargeback is initiated when you dispute a charge with your card issuer rather than with a store. It can reverse a transaction that's been posted to your credit card or bank account and can keep you from having to pay for fraudulent purchases—and help you get your money back if you're dealing with an unscrupulous or unhelpful merchant.

You can initiate a dispute and start the chargeback process for a variety of reasons, such as if you:

  • Get charged for a transaction you didn't authorize
  • Never received a product or service
  • Received a defective product
  • Are charged the wrong amount
  • Are charged for a service you canceled
  • Never got a promised refund

However, a chargeback isn't the right first step in every situation. Generally, unless you suspect fraud, you should contact the merchant and ask for a refund before filing a dispute.

How Do Chargebacks Work?

The chargeback process can be a complicated multi-step back-and-forth between various organizations that are trying to figure out who should be responsible for paying the transaction.

Here are the typical parties involved:

  • The account holder (you): The person who has the account or credit card and is disputing a transaction.
  • The card issuer: The bank or credit card company that issued your card.
  • The merchant: The company or individual who sold the goods or services in question.
  • The acquiring bank: The financial institution that allows merchants to accept cards, processes card transactions, and helps money flow from the cardholder's account to the merchant.
  • The card network: Companies like Visa and Mastercard that create and oversee payment networks. They also determine the chargeback rules for their respective networks.

How Do I File a Chargeback?

The dispute and chargeback process can vary depending on your card issuer, network and situation, but it generally goes like this:

  1. You dispute a transaction by phone, mail or online.
  2. Your card issuer refunds your money, decides you have to pay, or passes the chargeback on to the card network. If the chargeback moves forward, you might get a temporary credit for the disputed amount.
  3. The card network reviews the transaction and orders the issuer to pay or forwards the dispute to the merchant's acquiring bank.
  4. The acquiring bank sends the dispute back to the card network and says the issuer is at fault or forwards it on to the merchant.
  5. The merchant either agrees to pay for the transaction or disputes the chargeback.
  6. If the merchant disputes the chargeback, there may be several rounds of back-and-forth as the merchant, acquiring bank and card issuer try to settle the matter.
  7. Ultimately, the card network decides who pays.

You may have to send your card issuer supporting documents when you file a dispute, such as copies of a receipt, invoice, contract and any communications you had with the merchant. The dispute investigation can last up to 90 days or two billing cycles, whichever is shorter.

During the investigation, you don't have to pay the bill for the disputed amount and won't get charged interest on that part of your balance. But you still have to pay the rest of your bill. If the investigation is completed and it's agreed you shouldn't have to pay, you won't have to worry about the transaction again.

A chargeback won't always be settled in your favor, though. Merchants have the right to dispute your claim, and you may still wind up paying for the transaction plus interest.

You also shouldn't dispute a transaction simply because you don't want to pay—that's fraud. The merchant may file a civil case to try and reclaim its losses and a police report, which could lead to criminal charges.

When Should You Use a Chargeback?

As you can see, chargebacks can be complicated, and they may not yield the result you want. Here are instances when you might consider using a chargeback:

  • If you suspect fraud. Contact your card issuer or bank to dispute the charge if you suspect someone is using your card or account number without your permission. You may want to take additional steps to protect your finances, such as adding fraud alerts to your credit reports or signing up for credit monitoring.
  • If you have an issue with a merchant. First, contact the merchant directly if you're having trouble with an order, refund, product or service. If the merchant refuses to help and isn't following its own return policy or quality guarantee, you can then dispute the charge and try to get a chargeback.

However, you shouldn't dispute a charge because you changed your mind, weren't completely satisfied, or if the merchant had a clear policy that it doesn't accept returns. A chargeback can help you get your money back after you've been wronged, but in some cases you may have to live with buyer's remorse instead.

Will Disputing a Charge Affect My Credit?

Disputing a charge isn't considered good or bad in terms of your credit scores. However, the account might be marked as in dispute on your credit reports, which could impact your ability to qualify for a loan.

Also, while you don't need to pay the amount you're disputing while the chargeback process is underway, you still need to pay the remainder of your bill. Missing a payment can negatively impact your credit.

Additionally, if the dispute doesn't go in your favor, you'll need to pay for the charges if you don't want to be reported late.

Chargebacks Can Help Protect You

When you find an unexpected transaction on your account or have trouble with a merchant, a chargeback can help you keep your money in your pocket. Filing a dispute isn't always the appropriate response, and you should contact the merchant first if you don't suspect fraud.

However, when you use it properly, a dispute can result in a refund or statement credit for the transaction in question. Plus, you won't have to pay for the purchase while the transaction is being investigated.

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