Yes. Chargebacks do affect one’s credit score both as the consumer or the merchant. If a customer files a chargeback, their credit score may go down until the case is investigated and the decision is made. On the other hand, if you are the seller and unfortunately you do not win the dispute, you will have to return the clients’ money, and this can make your credit score to reduce significantly. To understand how chargebacks work, it is crucial that you have some background knowledge on what they are and the impact they have on those involved.
The Purpose of Chargebacks
A chargeback can look like any other traditional refund, but there is one relevant difference. Which is, instead of the customer contacting the involved business for a refund, they ask the bank to take money from the seller’s account forcibly.
If the customer complaints are valid and after the investigation, the bank finds that the client is right, funds are removed from the merchant’s account and transferred to the customer’s account.
What is terrible is that the consumer is no way obligated to return the product that was purchased. Chargebacks are designed for the consumer and not the merchant. They help the customer feel secure and keep the merchants focused on offering the best of services and products.
They are set to prevent sellers who might want to sell low-quality products or services. The cardholder will complain that the condition of the goods is not the one described and will ask to be refunded. Costumers are therefore protected from the effects of criminal fraud.
Why Chargebacks are also called “Friendly Frauds”?
When the chargeback system was introduced, some consumers abused the process by deliberately stealing from the merchants by filing a chargeback fraud complaint. Although chargebacks were created to protect the consumer from frauds, the industry is yet to understand the payment options, which has made some customers use the scheme as a weapon to attack the merchants. Even if the consumer is the one on the wrong, they may still be able to get their money back.
How chargebacks can affect your credit score
Chargebacks have both short and long consequences on your credit score:
1. Whenever a customer files a chargeback, the merchant should pay a fee ranging from $20 to $100 depending on the transaction. Even if the customer later cancels the chargeback, the merchant would still pay fees and any other cost associated with the process.
2. Even after the case is completed and the money has been refunded, if they do not feel compelled to return the goods, the merchant loses that revenue and any profit.
3. If your business receives many chargebacks complains within the same month such that they exceed the predetermined threshold, the merchant will have to pay excessive fines.
4. Even if the merchant wins the chargeback dispute, it does not guarantee that it will improve his or her chargeback-to-transaction ratio. Which means he or she will live with the risk of his account being terminated. Merchants will not be able to accept cards if they have a closed merchant account.
Merchants should work towards reducing the chargeback cases (both legitimate and illegitimate) filed against them. They can do that by making their return policies clear and selling products which are of high quality. They should also use a fraud detection tool to monitor transactions that could lead to chargebacks.