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What Is a Credit Card Chargeback?

This process can help you resolve a dispute with a merchant and protect you from fraudulent charges.

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As a credit card holder, you have some legal protections that can help you resolve a dispute with a merchant and protect you from liability if an unauthorized user makes a fraudulent purchase on your account. One of those protections is a credit card "chargeback" -- when a credit card issuer reverses a payment to resolve a dispute. 

Before initiating a chargeback, it's your responsibility to reach out to the merchant and attempt to resolve the issue. If that's unsuccessful, you can request a chargeback, and your credit card issuer will reach out to the merchant to investigate your complaint. Depending on the results of the inquiry, you will either receive a refund or not. 

As provided under the federal Fair Credit Billing Act, there are a number of scenarios when requesting a chargeback makes sense. But there are some risks, too. Here's everything you need to know about credit card chargebacks.

What is a credit card chargeback?

In short, a chargeback happens when a bank refunds a credit card payment that's been found to be illegitimate. Chargebacks are usually settled between a merchant and credit card issuer, but it's possible for a chargeback to happen to an individual -- for a suspicious ATM withdrawal, for example.

If the chargeback is not disputed, the merchant will issue a refund. If a merchant cancels a transaction for some reason, due to an error, that's known as a "voided" transaction. A chargeback shouldn't be confused with a credit card charge-off, which may happen if you fail to make at least the minimum monthly payment for six months in a row.

How do you reverse a payment?

You can reverse a payment by contacting the company that sold the product or service to you and ask for a refund. If you can't come to an agreement with the merchant, you can take the issue up with your credit card company and initiate a chargeback. According to the Consumer Financial Protection Bureau, you can dispute a charge even if you've already paid it off. In most cases, your issuer will wait to refund you until after it's determined that a chargeback is warranted.

 Before contacting your credit card company to dispute a charge, review the terms of your credit card agreement to make sure that you understand the dispute process. If you're not satisfied with your company's resolution of the dispute, you can take your complaint to the Consumer Financial Protection Bureau.

When should you use a credit card chargeback?

A chargeback is appropriate if you've attempted to resolve the issue with the merchant first and the purchase was made in your home state or within 100 miles of your home address or the price of the service or product was more than $50. Chargebacks can also be used in the case of unauthorized credit card use or failure to deliver a product or service.

If you are a cardholder, you should not use a chargeback if you simply forgot about the purchase, if a family member made the purchase, if there is a misunderstanding between you and the bank, or if a chargeback would be more convenient than resolving the problem.

Chargebacks are also not appropriate for buyer's remorse or dissatisfaction with a product. Instead, you should work with the merchant to resolve the issue. Under the Fair Credit Billing Act, you can use a chargeback to pursue a refund if an unauthorized user makes a charge on your card without permission.

What are the drawbacks of a credit card chargeback?

Just because chargebacks allow you to keep a refund or remove the charge from your credit card statement doesn't mean that you should use the ability whenever you feel the urge. The drawbacks of credit card chargebacks include the following:

  • Funds being tied up: Chargebacks can take weeks or even months to resolve, whereas a simple refund can often be obtained in just a few days.
  • Businesses becoming stricter: If the bank suspects that a cardholder is filing illegitimate chargebacks as a means of cyber-shoplifting, the cardholder's line of credit may be canceled and their account closed.

How to submit a chargeback

Unlike a refund, chargebacks are initiated through your credit card company, not the merchant. The process for submitting a chargeback varies depending on the card issuer, but generally, you will need to identify the erroneous charge and work with the issuer to initiate the process.

You may be able to initiate or process most disputes entirely online, or you may need to call your bank or submit a written request. The credit card issuer may request supporting documentation via mail or online form. Your bank will either post a temporary credit to your account for the disputed amount or pause payments and interest on that charge.

What happens after you submit a chargeback

The credit card issuer will reach out to the merchant to ask for evidence to refute the claim. If the cardholder's bank decides that the purchase was not valid, then the cardholder will receive a refund for the transaction.

This process can take up to 60 days to complete. If the cardholder's bank decides that the purchase was valid, then the charge will not be removed from their account. 

How does a chargeback affect retailers?

Chargebacks affect retailers in several ways. First, they lose the revenue from the sale, as well as the value of the merchandise and any overhead costs associated with fulfilling the order. They also have to pay a fee for every chargeback. Chargebacks can cause customer dissatisfaction and lead to negative reviews or publicity. Finally, chargebacks can label the retailer as "high risk," which can result in higher fees and penalties.

The bottom line

Chargebacks are a way for cardholders to dispute a charge and receive a refund. Chargebacks can be due to a billing error, fraud, or dissatisfaction with the quality of the product or service.

If you use your chargeback ability as a replacement for monitoring your accounts for fraudulent use, you may still end up being responsible for fraudulent charges. Chargebacks are intended to resolve legitimate billing errors, but if you abuse chargebacks, you may be subject to legal action.

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Correction, 7:30 a.m. PT Jan. 25: An earlier version of this article incorrectly stated that a customer's bank reaches out to a merchant's bank after a chargeback is initiated. The article has been corrected to clarify that, in most cases, the customer's bank will reach out to a merchant directly and attempt to resolve the dispute. The earlier version also incorrectly stated that an account holder might not have the right to a chargeback if they've already paid off the charge. The article has been corrected to clarify that an account holder can dispute a charge even if they've already paid it off. The article also incorrectly stated that a chargeback cannot be used to dispute a transaction that results from identity theft. The article has been corrected to clarify that an account holder can request a chargeback if an unauthorized user has made a charge on the account without permission. The earlier version also stated that an account holder could be subject to a fee if a chargeback is denied. The article has been corrected to clarify that there are no fees or penalties associated with requesting a chargeback or being denied for one.