What is a Credit Card Chargeback

A credit card chargeback is a reversal of a purchase made by credit card. The bank which issued the credit card can choose to perform a chargeback on the request of the consumer, and may in some places be required to do so by consumer protection laws.

– How Credit Card Chargeback Works –

When a charge is placed on a credit card, such as purchase of a good, the bank responsible for processing the transaction debits the card the appropriate amount and issues a credit of that amount to the merchant. The merchant gets the money on schedule. The consumer is then in debt for the amount on the card (since credit cards function, essentially, as highly versatile loan vehicles).

However, the chargeback procedure exists because in some cases an error is made – either by accident, or as a result of intentional fraud. Banks can thus choose to “charge back” the amount placed on the card – in other words, to reverse the transaction and take the money back from the merchant. Several legitimate reasons for chargebacks exist. These include processing errors by the bank, clerical errors by the merchant who submitted the charge, or consumer complaints that the transaction was reversed (e.g. they never received the goods and want their money back) or was even fraudulent (e.g. they never authorized the purchase in the first place, and have been victims of identity fraud).

Merchants who have had charges reversed can appeal to the bank and request that they be reinstated, provided they can convince the bank that the transaction was legitimate and should not have been cancelled. However, if they accumulate a large number of chargebacks, they may be penalized by their bank. Visa and MasterCard issue fines when a given merchant’s percentage of cancelled transactions rises above a certain percentage. To guard against this risk, some merchants choose to purchase chargeback insurance.

– Consumer Protection and Credit Card Chargeback –

The most important functions of credit card chargebacks are to protect consumers. Fraudulent transactions, such as those which arise from identity theft, often have to be charged back as part of the process of reversing the stolen cards, securing one’s identity, and cancelling the supposed debts incurred due to the thief’s activities. In the United States, the Truth in Lending Act establishes credit chargebacks as a consumer right.

In addition to fraud, chargeback is also an important method for enforcing rights given under consumer protection laws. Again, the particular rights to chargeback vary based on location, since laws differ. However, many consumer protection laws specify circumstances under which consumers have the right to contact their bank and order a credit chargeback when a merchant has broken the law.