What to Know about ChargebacksIf you haven’t used this consumer protection feature for credit and debit cards yourself, you’ve probably at least heard of it. Chargebacks allow you to reverse a financial transaction by communicating directly with your card issuer, bypassing the recipient of the transaction. It’s a great way to resolve billing issues or unauthorized charge from a stubborn merchant or a defunct business you can no longer contact, but it also has the potential for abuse that can create more problems than it solves. Whether you’re curious about how chargebacks could help you, or you’re currently going through one and are just looking to learn more about the process, continue reading for the lowdown on chargebacks.

What are chargebacks?

A chargeback is where the funds in a card transaction are returned to the customer by the card’s issuing bank or financial institution. Chargebacks are legally available to credit cardholders thanks to Regulation Z of the Truth in Lending Act, and to debit cardholders thanks to Regulation E of the Electronic Fund Transfer Act. Legitimate reasons to initiate a chargeback, according to card processing companies, include unauthorized purchases, billing errors and unresolvable customer issues with the merchant, such as delivering defective goods or not providing a service as it was described.

How do chargebacks work?

To perform a chargeback, first you need to submit a request to your card issuer, which you can do in writing, on the phone or online. Include the reason why you want the chargeback, along with any proof you can gather backing up your reason, such as itemized receipts, photos of the goods you received and records of any conversations you’ve had with the merchant. Your card issuer will review your request, and decide whether it will initiate the chargeback. In many cases, card issuers will go forward with a chargeback to make sure you, their customer, stay happy, but there are a number of reasons why a card issuer would deny one, as well. Assuming your request is accepted, your issuer will often give you a provisional credit on the money you want refunded automatically while the chargeback case proceeds. If this doesn’t happen, you can choose to withhold payment on the charge you’re disputing.

Your card’s bank will do a chargeback against the bank of whoever received the money you want returned. The recipient’s bank will open its own investigation to see if the chargeback is valid, and if so, it takes the money out of the recipient’s account, along with a chargeback fee of $15 to $25. At this point, the recipient can dispute the chargeback, presenting their own evidence that the transaction was valid. The banks involved will consider the dispute, and if they decide in favor of the dispute, the cardholder is charged again. Finally, the cardholder can appeal the dispute decision, at which point the card network (Visa, Mastercard, etc.) steps in and arbitrates a final ruling.

The upsides of chargebacks

Chargebacks are a strong consumer protection mechanism that give power to customers dealing with uncooperative merchants. They make debit and credit cards safer ways to pay, provide people recourse against dishonest sellers and give cardholders an advocate in the form of their card issuers. Since chargebacks are supported by federal law, no matter what a merchant’s or card issuer’s policies are, you will still receive a basic level of protection. Even still, many issuers try to make the chargeback process as easy as possible to initiate.

Potential consequences of chargebacks

As a cardholder, the downsides of attempting a chargeback are low. There is no penalty if your chargeback request is denied, and if the merchant successfully disputes your chargeback the consequence is that the transaction gets applied to your card again. Appealing a dispute decision and moving the case to arbitration does open you up to fees, as the party that loses the arbitration has to pay arbitration fees that total around $400. Even if you don’t lose the arbitration, if the card processor finds you violated dispute processing rules, you can be assessed technical fees of $100 each.

However, chargebacks can put a great amount of stress on businesses, and some merchants aren’t going to react well if you issue multiple chargebacks (or even just one chargeback) against them, or chargeback a large transaction for what they see as a flimsy reason. It’s entirely within the rights of a merchant to create a chargeback limit policy and refuse you service if you violate it. Other merchants could send the money you chargeback into collections as debt after the card issuers decide in your favor, and some collection services exist explicitly for this purpose. In extreme circumstances a merchant could even file a lawsuit against you by claiming you are trying to defraud their business, although this wouldn’t be financially feasible unless the cost of the chargebacks was very high. Even if the merchant doesn’t seek retribution against you, at the very least, excessive chargebacks could result in their business charging higher prices to offset the loss, or shutting down altogether.

While it’s easy go for a chargeback every time you have an issue with a business, talking to a merchant directly and giving them a chance to make things right could save you a lot of drama, time and effort in the future. For more information on great ways to make your credit cards work for you, read our credit cards blog.