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Exploring Credit Card Chargebacks

Brock94

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Since this sort of issue seems to come up from time to time, whether in connection with an eBay purchase or just something you bought at a store that didn't turn out as promised/expected and the merchant doesn't want to give you your money back, I thought I'd just do a little write up for everyone's general information about credit card "chargebacks". Disclaimer: Legal advice would require consideration of specific factual situations and application of the law to those situations. This is just general information and may vary based on specific circumstances, so rely at your own risk.

For anyone that doesn't know, a "chargeback" is when you call your credit card company and tell them that you would like to dispute a charge on your credit card bill, not because it is unauthorized, but because you have a dispute with the merchant that charged you. The credit card issuer will usually take some basic information from you and then credit the money back to your account while they simultaneously remove the money from the merchant's account. Why do they do this? Are they just being good corporate citizens, looking out for the little guy? Umm, no. They do it because of federal law.

Specifically, the Board of Governors of the Federal Reserve System issued regulations under the federal Truth in Lending Act that are designated as "Regulation Z". These regulations preempt state law and contractual agreement (meaning that banks can't change this by forcing you to agree otherwise in a credit card agreement) and apply to all consumer credit cards issued in the U.S.

Section 226.1(c) of Regulation Z says:

(c) Right of cardholder to assert claims or defenses against card issuer. 24 (1) General rule. When a person who honors a credit card fails to resolve satisfactorily a dispute as to property or services purchased with the credit card in a consumer credit transaction, the cardholder may assert against the card issuer all claims (other than tort claims) and defenses arising out of the transaction and relating to the failure to resolve the dispute. The cardholder may withhold payment up to the amount of credit outstanding for the property or services that gave rise to the dispute and any finance or other charges imposed on that amount.

In English, this means that if you have a dispute with a merchant that sold you something you paid for with your credit card and the merchant does not resolve the dispute satisfactorily (ie by giving you your money back when you return something), you are allowed to assert your claim against the credit card company as if the credit card company were the merchant.

As with most things legal, there are some conditions. The most important of them (for this discussion) are set forth in Section 226.12(c)(3) as follows:

(3) Limitations. The rights stated in paragraphs (c)(1) and (2) of this section apply only if:
(i) The cardholder has made a good faith attempt to resolve the dispute with the person honoring the credit card; and
(ii) The amount of credit extended to obtain the property or services that result in the assertion of the claim or defense by the cardholder exceeds $50, and the disputed transaction occurred in the same state as the cardholder's current designated address or, if not within the same state, within 100 miles from that address.

So if you were a credit card company, what would you do if a card holder called you up and started giving you details about how a merchant in East Podunct ripped him off? Would you collect information, call the merchant and get his side of the story and try to resolve the matter, all the while facing a lawsuit from your customer that has the right to treat you as the merchant in court?

NO-- you would simply take some basic information, credit the money back to the card holder, charge the money back from the merchant's account (pursuant to your agreement with the merchant that allows you to do so) and wipe your hands of the whole thing. So that is exactly what credit card companies do-- the law puts them in the middle and they get themselves out in the easiest way possible at no loss to them.

So, does that settle the dispute between the merchant and the credit card holder? As a practical matter, it usually does, as a legal matter it does not. The claims between the merchant and the cardholder still exist, but with the money back in the cardholder's account, the ball is in the merchant's court. IF the merchant wants to, he can bring suit against the cardholder for any of the remedies that may be available to him. Realistically, if he got his merchandise back, if the amount of money is small and/or if he thinks the cardholder has a decent chance of winning in small claims, it is most likely not worth the hassle, expense and lost time.
 
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shamaal

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Good writeup :thumbsup:

Now, can you expound the applicability for checkcards or debit cards?
 
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MountaineerGreen

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I bought a text book from a Half.com seller, they failed to mention that it was an "international edition", and I paid a good price for the book. I found it unacceptable, contacted the seller. He tried to bargain with me, I refused all offers, wanted a refund. I mailed the book back to him, per his instructions. Heard nothing, no money returned, no emails. I filed a claim with half, they said he was banned for a time because of problems with the way he did business. (go figure) He had no money in his half account, so I would have to wait until he got paid for something, then they would pay me. I waited, emailed and waited. Nothing. I called my credit card that I paid for the book with, told them what was going on. They asked me to send in documentation, I did. Money credited back to my account the next few days. I got a nasty email from half that said something about chargeback received, no further action will be taken. :)

I was told by someone that if you do that a couple of times, they will cancel your account.
 
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Brock94

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Good writeup :thumbsup:

Now, can you expound the applicability for checkcards or debit cards?

That's easy, there's no applicability to checkcards and debit cards. When it comes to those, you are at the mercy of your bank. The banks generally have adopted a few consumer friendly policies (such as limitations on liability for unauthorized transactions) because it would be terrible customer relations to do otherwise, however, they exercise their discretion each and every time. I could be wrong, but I'm not aware of any bank allowing a chargeback of a debit transaction because of a dispute with the merchant.

So whatever your bank or paypal or whoever tries to hype about online buying protection, your best bet is to use only credit cards for online transactions.
 
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MountaineerGreen

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So whatever your bank or paypal or whoever tries to hype about online buying protection, your best bet is to use only credit cards for online transactions.

Absolutely.

I always pay for my stuff, even if its through paypal with a credit card. That way if things go south, I have leverage.
 
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shamaal

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Stay with me on this,

So when I go to my auto store and use my V*SA check card they ask if I want to charge or debit. With charge I sign a slip of paper and with debit I use my PIN.

Is the transaction where I signed the paper eligible for a chargeback?
 
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Brock94

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Stay with me on this,

So when I go to my auto store and use my V*SA check card they ask if I want to charge or debit. With charge I sign a slip of paper and with debit I use my PIN.

Is the transaction where I signed the paper eligible for a chargeback?

No, because even though it is processed through the credit card system, it is not a credit card transaction, it is a debit transaction. The key is that the money comes right out of your account rather than being an extension of credit from your bank.

There's an interesting side note not related to your question-- The bank gets a small fee of a few cents deducted from the amount that goes to the merchant if you use your PIN. If you process it as a credit card (by pushing the credit button and signing the slip), the bank gets a fee of 3% or more of the total purchase. This is why some banks will give you a token credit of, say 0.5% if you process as credit rather than with the PIN-- the bank pockets the other 2.5% or more.
 
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