Chargebacks and their Effect on Credit Score

Chargebacks and their Effect on Credit Score

Chargebacks and their Effect on Credit Score

At first glance, credit card chargebacks appear to be just like refunds. However, there is one very distinct difference between a chargeback and a refund. With a chargeback, the customer contacts the credit card company or bank for a refund, rather than the business they made the purchase from. While chargebacks are designed to protect consumers from unauthorized transactions, it’s important to understand  chargebacks and their effect on  credit score so you can avoid any detrimental impact to your business.  

Do Chargebacks Hurt Your Business Credit Profile?

Fortunately, chargebacks will not have a negative impact on your business credit score. But, if you get enough of them, they can affect your merchant account. This can lead to higher processing fees and/or the loss of merchant accounts. 

How Does a Chargeback Work?

There are a number of steps involved in the chargeback process. Here’s a brief overview of it.

1. Customer Disputes the Purchase

If a customer doesn’t receive an item, determines an item or service is not as described, or sees an unauthorized transaction, they may contact the credit card company to dispute it. 

2. Issuer Reviews the Chargeback

Once the issuer receives the chargeback request, they’ll determine whether it’s invalid or valid. If it’s invalid, the process will end and the customer will be notified. However, if it is valid, the process will continue. 

3. Customer Gets Reimbursed

The issuer will process the valid chargeback and provide the customer with a credit for the amount they disputed. When this happens, the business’s merchant account is debited for a credit charge and they’re on the hook for a chargeback fee that ranges from $15 to $100.

4. Merchant Receives the Chargeback

After the customer gets reimbursed, the merchant will find out through their merchant account processor. They’ll receive an email notification or physical letter in the mail. The notification will include directions on how to respond to the dispute. 

5. Merchant Responds and Appeals

The merchant has the option to submit a response and appeal the chargeback. If they’re unsure of what a chargeback is, or believe the chargeback isn’t worth much, there’s a good chance they won’t respond and simply accept the chargeback. 

If they do respond, they’ll have to prove they provided the product or service in questions and may wait months for the chargeback to resolve. Sometimes, the process of appealing a chargeback can cost more than the value of the original product or service. 

How Do Chargebacks Hurt Your Business?

Since the dispute process is so easy, you can’t ignore chargebacks and their effect on credit score can have—even if it is indirect. Don’t be surprised if customers request chargebacks, even when there hasn’t been any fraudulent activity. They may do so because they weren’t satisfied with your product or service or believe it was wrongly represented online. Or, they simply didn’t recognize the charge on their credit card statement. 

If you’re a business owner, it’s important to take chargebacks very seriously. Here’s why: When you’re hit with a chargeback, you’ll miss out on more than just the dollars that were disputed. You’ll also lose money on chargeback fees as well as all the time and money you spend selling, packaging, and delivering the product. 

In the event your chargeback ratio (total chargebacks divided by total sales transaction) reaches a certain point, you’ll face one of these consequences: higher processing fees or a lost merchant account. If you completely lose your merchant account, you’ll have to find a processor who accepts “high risk” merchants.

Preventing Chargebacks   

While you may not be able to completely prevent them, there are several things you can do to reduce chargebacks. Here are several ideas.  

Excellent Customer Service

In today’s increasingly competitive marketplace, the customer truly is king. So if you treat every new and loyal customer well, they’re less likely to initiate a chargeback. If you find out a customer is dissatisfied for any reason, reach out to them promptly to resolve the issue. 

A Customer Centric Return Policy

When it comes to your return policy, try to be as flexible and lenient as you can. Also, make sure it’s clearly outlined and easy for just about any customer to find and understand. Remember that a return is far cheaper and more convenient than a chargeback. 

Offer Live Chat

A live chat can give customers the quick answers they need to avoid chargebacks. For instance, if they can log on to your website, chat with a representative, and find out when their package will arrive, they may refrain from pursuing a chargeback.

Detailed and Accurate Product Descriptions

If you’re an online retailer, make it a priority to write highly detailed and accurate product descriptions. This way your customers will know exactly what they’re buying. Good descriptions can eliminate surprises and the temptation to pursue chargebacks. 

Realistic Expectations of the Product/Service Results

When you sell your products and/or services, don’t make promises you can’t keep. Set realistic expectations with your customers so they know exactly what they’ll get if they invest in your offerings. 

Easy to Find Shipping/Tracking Information

While some customers won’t mind waiting for your products, others will want to receive them as soon as possible. Since those who don’t want to wait may file chargebacks, it is in your best interest to provide them with shipping and tracking information. This information can keep them up-to-date with the status of their order and reduce their chances of initiating a chargeback.

Follow Up on Irregular Orders

If you notice that a customer who usually orders the same items each month places an irregular order, follow up with them. Following up can allow you to ensure there was no mistake on your customer’s behalf and prevent a chargeback as a result. 

Document Conversations with Customers 

Keep accurate records of your customers’ credit card transaction amounts and dates as well as their authorization details. You should also document any conversations you have with customers and store any receipts or contracts they signed. Documentation can allow you to win a dispute against a customer who is trying to take advantage of the chargeback system or forgot they made a purchase.

Use a Clear Descriptor

If your business name is “Mike’s Bike Shop,” that is the name that should appear on each customer’s credit card statement. A parent name or different name that customers don’t recognize can put you at high risk for chargebacks. Your payment descriptor should be very clear and easily recognizable by your customers. 

This article was originally written on February 26, 2020 and updated on March 16, 2020.

Rate This Article

This article does not have any ratings yet.

Have at it! We'd love to hear from you and encourage a lively discussion among our users. Please help us keep our site clean and protect yourself. Refrain from posting overtly promotional content, and avoid disclosing personal information such as bank account or phone numbers.

Reviews Disclosure: The responses below are not provided or commissioned by the credit card, financing and service companies that appear on this site. Responses have not been reviewed, approved or otherwise endorsed by the credit card, financing and service companies and it is not their responsibility to ensure all posts and/or questions are answered.

Leave a Reply

Your email address will not be published. Required fields are marked *