Pitfalls To Chargebacks


The chargeback is an amazing feature that you get with every credit card purchase.

What is a Chargeback?

Your credit card agreement protects you from having to pay for goods or services that are not received.  In essence, the credit card processor is acting as an intermediary for every transaction.   If you do not receive the goods or services, you don’t have to pay for them.   Likewise, when a card holder fails to pay their bill, the merchant still gets paid.    Interestingly, the right to a chargeback is guaranteed by the Federal Reserve under the Electronic Funds Transfer Act.

Why Is It So Powerful?

As I explained recently towards the end of this article, a chargeback is a merchant’s worst nightmare.  When you threaten a chargeback, you are not just calling into question the amount in dispute, but you are severely endangering a merchant’s relationship with their credit card processor.    This is especially true with an airline.    The rate of chargebacks a merchant gets can change their service fees that they pay to their processor.    Going over a certain percentage by just a single chargeback can cause their merchant fees to jump by a fraction of a percentage point.   That doesn’t sound like much, but it can cost a large company tens of thousands of dollars a year or much, much more.    Worse yet, in the case of an airline, a large percentage of the money you think you are paying to the airline is held back until the flight is actually flown.    This is why you can get refunds from your credit card company if the airline goes out of business after you your ticket.   These holdbacks have even caused an airline to go bankrupt. To make a long story short, airlines will do anything to avoid a chargeback, and the threat of a chargeback will prompt them to do the right thing.

Use and Misuse

As they say in Spiderman, “with great power comes great responsibility”.    I strongly recommend that you only request chargebacks after attempting to resolve your dispute directly with the company at issue.   In fact, I would make sure you speak with a manager and a supervisor, informing them that you will request a chargeback if they do not immediately deliver the product or service that they promised.

Ways A Chargeback Can Go Wrong

The chargeback is not a foolproof way of resolving all disputes in your favor.   In fact, the credit card companies can be rather clumsy in their handling of these issues.    In a recent matter I was involved in, I sent supporting documentation to the credit card company several times, yet kept getting letters saying that they had not received my documentation, and were closing the case.

In this article, The Consumerist goes over several reasons why your claim may be denied.    Most of the problems people will encounter are due to lack of documentation.     You should always retain package tracking numbers, and reservation cancellation numbers as if they were cash itself.   Without them, you will have no way to prove your claim, should it ever come to that.

Interestingly, there seems to be some difference between credit card companies when it comes to processing chargebacks.    Visa and American Express seem to be very customer friendly, while Mastercard seems to lay the burden of proof squarely on your shoulders.

Another interesting aspect on chargebacks is the statute of limitations.   In this case, a traveler was unable to issue a chargeback because his prepaid hotel was charged more than 60 days in advance.    This can be a big problem when traveling, as many vacationers will prepay items several months before they travel.     Currently, the trend is to ask for prepayment to get the best deals on hotels, car rentals, and travel packages.     In response to these trends, all you can do is try to prepay within the chargeback period.

Airline travel seems to be the major exception, as the failure of an airline regularly results in the refund for the unused travel for those who purchased by credit card.

Another Tool In Your Financial Arsenal

Business is business, and we all know that merchants and banks can and will take every measure they can to make as much money as possible.     When they feel that you have not played by their rules, they will take every legal means against you such as ruining your credit and foreclosing on your house.    When they are not playing fair, you also have several tools at your disposal.   When you conduct transactions with your credit card, one of the most effective and convenient of them is the chargeback.

Use it wisely.

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4 Responses to “Pitfalls To Chargebacks”

  1. Neil Says:


    As you say I think it is often best to deal with the company direct, using the threat of a chargeback as and when needed to get them to do the right thing. You might actually get more out of them using this approach.

  2. Kay Clark Says:

    I have a disputed claim, over $5000 from 2001. I was granted the credit, but it took over 6 months, and in the meantime account was sold as bad debt to Unifund. Sold at least three more times, now i find a judgement against me to closed po box. Will be asking to set aside for none service, BUT I will have to defend again in court. Any help?

  3. Dolar Says:

    Secured process transactions solution will overcome the multi-currency barrier and prevent chargeback risks by making customers feel as if they are shopping in their own country and in their own currency.

  4. Money Hacks Carnival #73: Working For The Weekend Edition | Money Beagle Says:

    [...] to get your free credit report posted at The Dough Roller.Mr Credit Card presents Pitfalls To Chargebacks posted at Ask Mr Credit Card.Kate Kashman presents One Small Step to Improve Your Finances posted [...]

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