What Happens to the Merchant When You Dispute a Charge?

A successful charge dispute triggers a chargeback, immediately reversing funds from the merchant’s account and returning them to your account. Merchants can contest this—but risk further penalties if unsuccessful. 

Ever wondered what happens on the merchant’s end when you dispute a charge? It’s more than just a simple notification. Merchants face potential financial losses, extra fees, and even a hit to their reputation. Before you initiate a dispute, it’s important to understand what a credit chargeback is and its impact on you and the businesses you interact with. 

Let’s explore exactly what happens to a merchant when you dispute a charge so you can make informed decisions and use this consumer protection tool responsibly.

Key Takeaways:

• Merchants may want to cancel a chargeback even if your bank sides with you.
• Your bank will initially cover the cost of a chargeback until the matter is settled.
• It’s often best to contact a merchant before initiating a chargeback.

Table of Contents: 

• What Is a Chargeback?
• What Happens When You Dispute a Charge?
• The Chargeback Dispute Process for Merchants
• Tips for Requesting a Chargeback
• Monitor Your Credit With Credit.com
• Charge Dispute FAQ

What Is a Chargeback?

A chargeback occurs when you successfully dispute a charge on your credit card. The charge is taken off your credit card account and the money paid to the merchant is reversed (or “charged back” to the merchant). Many people dispute credit card charges for services not rendered. For example, there was a strong link between COVID-19 and chargebacks throughout 2020 as many companies struggled to keep up with demand.

A chargeback can be a powerful tool for consumers who do not receive products or services they paid for, but it comes with several caveats. Even if the credit card company sides with you, the merchant may not—and they may try to collect the chargeback funds. 

This is called a chargeback dispute. 

What Happens When You Dispute a Charge?

The Truth in Lending Act is the federal law that gives consumers the legal right to dispute credit card charges if there is a billing error, as outlined in the Federal Reserve’s Consumer Compliance Outlook. This law defines a card issuer’s responsibilities when cardholders file disputes.

When you dispute a charge with your credit card company, it must conduct what the law calls a “reasonable investigation” to determine whether the charge was correct. It must also present you with the result of the investigation within 90 days.

During that process, the credit card company typically reaches out to the merchant involved in the charge. It requests documentation from the merchant regarding the transaction in question, and the merchant may be able to state why the charge was correct.

If the credit card company sides with you, it removes the charge from your credit card statement, and you do not need to pay the charge on your credit card.

The Chargeback Dispute Process for Merchants

The process of managing chargeback disputes looks different for merchants than for consumers.

Here are the six steps merchants will typically follow to dispute a chargeback if they choose to do so. 

1. Chargeback Notification

When a cardholder disputes a transaction, their issuing bank initiates a chargeback. The merchant’s acquiring bank or payment processor then relays this notification to the merchant. 

This notification is critical because it contains the reason code—which is the core reason for the chargeback and dictates the type of evidence needed for a successful dispute.

The notification also includes essential transaction details like the transaction date, amount, cardholder’s name, and potentially even the card number’s last four digits. Merchants will log and document every chargeback notification.

2. Gather Evidence

Merchants must collect all relevant transaction details: order confirmations, invoices, shipping/delivery confirmations (with tracking numbers), proof of authorization (AVS, CVV matches), customer communications, and terms and conditions. This information can include call logs, emails, or chat conversations.

Reason code-specific evidence is crucial here. Some common codes—and the evidence needed to support the code—include:

• Item Not Received: Detailed shipping information with tracking data showing delivery.
• Item Defective: Product descriptions, quality control records, and customer support logs showing attempts to resolve the issue.
• Unauthorized Transaction: AVS/CVV matches, IP address verification, and potentially signature capture.
• Recurring Transaction Canceled: Cancellation confirmation emails, records of the customer’s cancellation request, and proof that the cancellation was processed.

3. Prepare the Representment Package

If the merchant chooses to dispute the chargeback, they will prepare a clear representment letter addressing the specific reason code. This letter must clearly state why the chargeback is invalid, referencing the specific reason code and outlining the supporting evidence.

All collected evidence should also be attached as proof. In addition, merchants must adhere to card network rules (Visa, Mastercard) and meet strict submission deadlines, or their dispute may be deemed invalid.

4. Submit the Representment Package

The representment package is then submitted to the payment processor or acquiring bank within the specified timeframe. This can be tricky, as some payment processors have very specific guidelines and may even require the package to be submitted by physical mail. 

Merchants are responsible for adhering to all guidelines, tracking the submission, and keeping records of all communication. 

5. Await the Decision

The cardholder’s issuing bank will then review the representment package. The merchant receives a decision notification: representment accepted (funds returned) or denied (merchant loses funds). If denied, arbitration through the card network may be an option.

6. Analyze and Prevent Future Chargebacks

Staff should be trained on chargeback prevention, and merchants should analyze chargeback data to identify patterns and implement prevention measures: 

• Improve customer communication
• Enhance credit card fraud detection
• Clearly display return policies 
• Use secure payment gateways
• Require signature confirmation for deliveries
• Improve record-keeping

To avoid chargebacks, a merchant will work to understand the reason codes, stick to deadlines, keep careful records, follow card network rules, and be proactive about preventing fraud.

Tips for Requesting a Chargeback 

No one wants to deal with an issue only to have it pop up unexpectedly in the future—especially financial issues that could affect credit scores. Here are some tips to avoid future issues when you request a chargeback.

Only Dispute Credit Card Charges If You Have a Legitimate Reason

Unfortunately, some people request chargebacks even if they received the goods or services in question. They might do so because they have a problem with the vendor or simply because they don’t want to pay for the products. That last instance counts as fraud, and it could lead to your credit card account being closed or other legal consequences.

Reach Out to the Vendor First

Before you file a chargeback, give the merchant a chance to make the issue right first. Many merchants are willing to work with you and might refund the money, offer an exchange, or work to resolve your specific grievance. 

As part of your chargeback process, you’ll want to demonstrate that you attempted to contact the merchant about the issue. If you file a chargeback without working with the vendor first, you give the vendor more of a reason to insist that you still owe the money.

Act Quickly

You must dispute a credit card charge in writing, and your letter should reach the credit card company within 60 days of the first bill or statement with the error on it. This short timeline means knowing how to read a credit card statement is critical.

Keep an Eye on Your Account

According to the Federal Trade Commission, you can withhold payment for disputed charges while the investigation is underway. Your credit card company can’t penalize you with late fees, interest, or reports to the major credit reporting agencies regarding nonpayment of those charges. 

That doesn’t, however, extend to your account in general. Implementing relevant tips for improving your credit history can keep your score from falling during the investigation. If you do pay your credit card charges and then realize something isn’t right, you can dispute that error. A decision in your favor might result in a credit to your account.

Save the Documentation

Don’t toss receipts, emails, or other evidence just because the chargeback occurred. You might need the documentation again if the merchant decides to try to collect from you. Typically, the higher the amount in question, the more important it is to maintain your documentation.

Monitor Your Credit With Credit.com

Chargebacks won’t affect your credit score alone, but there’s a margin for error while investigation is underway. In addition to reviewing your statements regularly, ensure you’re familiar with the laws that protect you and how you can assert your rights. 

If any type of inaccurate negative reporting dings your credit—whether it’s related to a chargeback collection or not—tools like credit dispute letters can be vital.

One way to help protect yourself is to stay on top of your credit—get your free credit report card today. 

Charge Dispute FAQ

What’s the Difference Between a Refund and a Chargeback?

Chargebacks are granted by card issuers, while refunds come directly from merchants. While chargebacks can become lengthy and complicated processes, refunds are often straightforward.

So long as your claim aligns with a merchant’s terms and conditions, you’ll likely receive a refund shortly after the merchant receives the product you wish to return. 

Can a Merchant Try to Collect the Money From You After a Chargeback?

The Truth in Lending Act covers your right to dispute a credit card charge, but it doesn’t define what merchants are obligated to do—nor does it bar a merchant from trying to collect the money from you later. Instead, merchant agreements outline what actions a merchant can and can’t take concerning a dispute.

A chargeback means that the credit card company decides in your favor regarding the dispute. It doesn’t mean the merchant agrees or that they’ll return your funds.

Merchants can engage in “chargeback representment” to challenge your chargeback request and prove the original payment was valid. This process can be challenging, and merchants must decide if the potential loss of revenue is worth it—or if they might lose consumer trust with an aggressive approach without evidence.

The merchant might also seek to recover its loss by invoicing you for the charges. If you don’t pay, it might threaten collections activity or even sue you. Understanding your debt collection rights is pivotal if legal action seems imminent.

How Can I Dispute a Charge?

If you find a questionable charge on your credit or debit card statement, start by carefully reviewing your records and gathering any relevant documentation, such as receipts or confirmations. 

Next, contact your card issuer and provide them with the details of the disputed charge. Be prepared to clearly explain why you are disputing the charge and submit any supporting evidence you have gathered. The card issuer will guide you through their dispute process, which may require additional information. 

How to Do a Chargeback?

Initiating a chargeback, which is a powerful tool for consumers seeking refunds, begins with contacting the card issuer. The cardholder must articulate the grounds for the chargeback—fraud, non-delivery, or defective goods—and substantiate their claim with evidence. 

Adhering to the issuer’s procedural guidelines and respecting strict deadlines are paramount for a successful chargeback. This process essentially compels the merchant to reverse the disputed transaction.

What Does Dispute Transaction Mean?

“Dispute transaction” is the formal act of challenging a charge appearing on a credit or debit card statement. It signifies a cardholder’s assertion that a listed transaction is inaccurate or unauthorized. This action triggers an investigation by the card issuer to resolve the discrepancy and potentially reverse the charge.

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