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“Pay by credit card” has been a mantra of consumer-finance advice since 1975, when shoppers won the right to dispute charges on their credit-card bills. It’s still wise advice. But a Consumer Reports investigation has found that this landmark consumer protection is less muscular than it appears.
“We get calls all the time from people who just don’t understand their rights,” says Linda Sherry, editorial director of Consumer Action, a California nonprofit advocacy organization. “There’s just a lot of misunderstanding out there by consumers about credit-card billing law.”
How many consumers dispute credit-card charges each year? The number certainly is in the millions, although such data are not publicly available. American Express, Discover, MasterCard, and Visa declined to provide us their figures.
How many consumers dispute credit-card charges each year? The number certainly is in the millions, although such data are not publicly available. American Express, Discover, MasterCard, and Visa declined to provide us their figures.
The percentage of cardholders denied a so-called charge-back, or refund, is also unclear. But recent headlines suggest that wrongly denied refunds abound.
Last fall, for example, American Express settled New York State attorney general allegations that it failed to investigate and resolve $3.2 million worth of billing disputes filed by some 10,000 cardholders for 18 months ending in May 2003. Some customers said, among other things, that they never received goods purchased via the Internet using their AmEx cards and PayPal, an online payment facilitator.
Last fall, for example, American Express settled New York State attorney general allegations that it failed to investigate and resolve $3.2 million worth of billing disputes filed by some 10,000 cardholders for 18 months ending in May 2003. Some customers said, among other things, that they never received goods purchased via the Internet using their AmEx cards and PayPal, an online payment facilitator.
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In its settlement, American Express agreed to let the aggrieved PayPal customers dispute the charges again; it would then investigate and reimburse those entitled to a refund, as it should have done originally. American Express, which admitted no wrongdoing, also paid an $85,000 fine.
Credit-card issuers say they comply with or exceed the regulations to keep cardholders happy so that they’ll use their cards. Merchants complain that card issuers do so to a fault, granting charge-backs too easily because they can dump the cost on retailers.
Our examination of the regulations and interviews with Federal Reserve attorneys, regulators, card issuers, and consumers found that dispute rules are confusing, card issuers sometimes skirt them, and many consumers misunderstand the rights that they do and don’t have.
The good news is that it’s in a credit-card company’s interest to fix most problems fast. It costs at least $25 to process a dispute, so it’s cheaper simply to credit you for small amounts without an investigation. “It can be very expensive to extend this process,” says David Webster, a Bank One Card Services senior vice president.
For larger disputes, credit-card issuers also probably weigh whether you’ll take the matter to court or cut up your card (it can cost up to $200 to replace you). The higher the disputed amount, the more incentive the issuer has to dig in its heels.
Outdated safeguards
Paying by credit card provides greater protection than using a debit card, check, or cash because of the federal Fair Credit Billing Act and Federal Reserve System Regulation Z. These 1970s-era safeguards established deadlines for investigating, responding to, and resolving complaints about billing errors. But their protections are far from comprehensive:
• Consumers typically expect a credit refund when they’ve inadvertently bought junk. A Federal Reserve Board handbook suggests they’ll get just that when it says, “The Fair Credit Billing Act allows you to withhold payment on any damaged or poor-quality goods or services purchased with a credit card.” But the regulations don’t consider product-quality disputes to be “billing errors” if the consumer has accepted the goods, so no refund is required. Goods “not delivered as agreed” and not accepted are covered, but poor-quality goods are not. “There is a little bit of a gray area in the regulations about when a dispute is over goods not delivered as agreed as opposed to the quality of those goods,” says Kenneth Dreifach, a New York State assistant attorney general.
• Inflation and a deregulated marketplace have made the penalties for ignoring the dispute regulations meaningless. A card issuer forfeits $50 at most for not responding to a dispute in a timely fashion and risks paying double the finance charge on the disputed amount ($100 minimum, $1,000 maximum), but the consumer has to take the matter to small-claims court and win.
• The regulations haven’t kept pace with regulators. In 1998, the federal Office of the Comptroller of the Currency, which had been simply filing and tracking the volume of complaints, began intervening in complaints concerning most of the largest credit-card issuers. The OCC’s Customer Assistance Group (800-613-6743; www.occ.treas.gov/customer.htm) is now a de facto appeal avenue for consumers who were denied a refund and still dispute the charge. But many consumers don’t know that. (Different agencies regulate various types of issuers; the OCC says it will direct consumers to the appropriate regulator.)
• More than half of all disputes arise from consumers’ not recognizing a charge. One reason is that merchant identifiers often list a corporate name rather than a more familiar storefront name. Some experts say the problem is caused by a limited number of characters available for such records in the computers that banks use. (That is not the case with American Express.) Better identification would reduce the number of needless disputes.
• Debit cards, while not credit instruments, have evolved into a payment method that is used as easily as credit cards and often bear the Visa or MasterCard logo. But debit-card purchases have much weaker consumer safeguards than do credit-card purchases.
Consumers who seem to have a legitimate claim but have trouble getting charge-backs are not hard to find:
Edward Hug, a retired engineer from New London, Conn., says he lost $575 when AARP First USA Visa refused to correct duplicate billing of cash advances made while he was in Peru in 2001. Bank One, which owns the First USA brand and also issues credit cards under other company labels, says that after Consumer Reports inquired about the matter, it decided to accept Hug’s claim and send a $575 refund.
Rick Miller, a lawyer from Harker Heights, Texas, disputed a $29 charge on his Discover card for “AccountGuard” service that he said he never requested. Discover hit Miller with a $32 finance charge because he paid his balance in full except for the disputed $29, which is his right. Last July, a month and a half after Miller initially complained and after he asked the Texas attorney general to become involved, Discover removed the $61 in charges. Discover says that it never received Miller’s first letter and that the box Miller checked on a form to decline AccountGuard had been misconstrued as initials indicating his acceptance.
Michael Steiner, a Seattle ophthalmologist, kissed $3,500 goodbye when American Express refused to reverse a charge for jewelry he bought in Thailand in 2002 but immediately returned to the merchant. American Express says only that the case is complicated. Steiner had also charged $2,500 of the purchase to his Visa card from Bank of America, which gave him a charge-back with no problem.
How to fix Simple errors
Some billing errors can be addressed with a phone call to the credit-card company’s customer-service department. They include these problems:
Unfamiliar charges. Many consumers question their bills because the merchant identifier on the monthly statement shows a merchant’s corporate name rather than the store name. Bank One, which now gets the merchant on the phone with you, says it clears up 86 percent of these cases on the first call without a formal dispute’s being filed.
Clerical errors. Many are easily handled with a call to customer service.
Fraud. These errors tend to be fixed quickly because card issuers want to maintain your faith in the security of their cards. Besides, you pay for fraud in your finance charges and annual fees. If you suspect fraud, call customer service immediately, have your account closed, and open a new one. Follow up with a letter.
How to fix other errors
For other problems, you’ll need to write a dispute letter to your credit-card issuer. The letter preserves your right to dispute errors; a phone call may not. The credit-card issuer must receive your letter within 60 days from the statement date. Don’t send it with your bill, but rather to the address for disputes on the monthly statement. Include copies (not originals) of all documents supporting your claim. The card issuer should acknowledge your letter within 30 days of receipt.
Write a dispute letter if you have one of the following problems:
Unauthorized charges. These include automatic charges you authorized when you signed up with, say, an Internet service provider but have since canceled. Create a paper trail by telling such companies in writing that you’re canceling your service and immediately withdrawing authorization for further charges. Include a copy with your dispute letter to your credit-card company.
Cramming. This involves charges the credit-card issuer tacks on for insurance or other services it sells. In some cases, you “accept” the charge by not signing a fine-print refusal or bill stuffer. Immediately send a dispute letter telling the card issuer to refund the entire amount, not to prorate charges for the partial month during which you supposedly enjoyed the service.
Goods not delivered. In your letter, request proof from the card issuer that the item was delivered--something with your signature of receipt, not just a computer-generated delivery confirmation.
Failure to credit returned items. Sometimes merchants forget to credit you for returns. Get a receipt whenever you return something, so that you can send a copy of it along with your dispute.
Poor-quality merchandise. First, try to convince the merchant to exchange or take back the item. If it will take it back, get a signed receipt and ask that the purchase be credited to your card. If the merchant won’t, write a letter to the business via certified mail, return receipt requested, rejecting the item and stating when and where you tried to return it. Include a copy when you write your dispute letter to the card issuer. The regulations don’t provide much protection against poor-quality goods, so you should make a case that the item was not delivered as agreed and not accepted by you.
If your dispute letter is not getting you anywhere,consider writing to the card issuer's president, asking that your dispute be escalated. “Most companies have a section called ’escalations,’” says Dreifach, the New York assistant attorney general. A complaint to a state attorney or to the OCC may help.
If all else fails, you can pursue a refund in small-claims court. Most billing disputes qualify. For amounts that exceed the limits of small-claims court (limits vary by area), many big credit-card issuers require arbitration. There, the rules of allowable evidence may be set by an arbitrator paid in part by the credit-card issuer. You usually have no right to appeal an unfavorable ruling. Although arbitration is pitched as less formal than a regular court contest, you may be up against a lawyer for the credit-card issuer, so it's advisable to have your own attorney, too.
Toward better protection
The Federal Reserve Board is reviewing billing-dispute rules. Share your comments at http://www.federalreserve.gov/feedback.cfm. CU recommends these changes:
• Explicitly define or interpret disputes about quality as “billing errors.”
• Require card issuers that deny errors to notify consumers that they can complain about the decision to bank regulators, and include an address.
• Add a meaningful dollar penalty for credit-card issuers that fail to comply with the regulations if the consumer is forced to go to court and wins.
• Require that credit-card statements identify the merchant name in a manner easily recognizable to the consumer.
• Extend to debit cards all protections that cover credit cards.
Credit-card issuers say they comply with or exceed the regulations to keep cardholders happy so that they’ll use their cards. Merchants complain that card issuers do so to a fault, granting charge-backs too easily because they can dump the cost on retailers.
Our examination of the regulations and interviews with Federal Reserve attorneys, regulators, card issuers, and consumers found that dispute rules are confusing, card issuers sometimes skirt them, and many consumers misunderstand the rights that they do and don’t have.
The good news is that it’s in a credit-card company’s interest to fix most problems fast. It costs at least $25 to process a dispute, so it’s cheaper simply to credit you for small amounts without an investigation. “It can be very expensive to extend this process,” says David Webster, a Bank One Card Services senior vice president.
For larger disputes, credit-card issuers also probably weigh whether you’ll take the matter to court or cut up your card (it can cost up to $200 to replace you). The higher the disputed amount, the more incentive the issuer has to dig in its heels.
Outdated safeguards
Paying by credit card provides greater protection than using a debit card, check, or cash because of the federal Fair Credit Billing Act and Federal Reserve System Regulation Z. These 1970s-era safeguards established deadlines for investigating, responding to, and resolving complaints about billing errors. But their protections are far from comprehensive:
• Consumers typically expect a credit refund when they’ve inadvertently bought junk. A Federal Reserve Board handbook suggests they’ll get just that when it says, “The Fair Credit Billing Act allows you to withhold payment on any damaged or poor-quality goods or services purchased with a credit card.” But the regulations don’t consider product-quality disputes to be “billing errors” if the consumer has accepted the goods, so no refund is required. Goods “not delivered as agreed” and not accepted are covered, but poor-quality goods are not. “There is a little bit of a gray area in the regulations about when a dispute is over goods not delivered as agreed as opposed to the quality of those goods,” says Kenneth Dreifach, a New York State assistant attorney general.
• Inflation and a deregulated marketplace have made the penalties for ignoring the dispute regulations meaningless. A card issuer forfeits $50 at most for not responding to a dispute in a timely fashion and risks paying double the finance charge on the disputed amount ($100 minimum, $1,000 maximum), but the consumer has to take the matter to small-claims court and win.
• The regulations haven’t kept pace with regulators. In 1998, the federal Office of the Comptroller of the Currency, which had been simply filing and tracking the volume of complaints, began intervening in complaints concerning most of the largest credit-card issuers. The OCC’s Customer Assistance Group (800-613-6743; www.occ.treas.gov/customer.htm) is now a de facto appeal avenue for consumers who were denied a refund and still dispute the charge. But many consumers don’t know that. (Different agencies regulate various types of issuers; the OCC says it will direct consumers to the appropriate regulator.)
• More than half of all disputes arise from consumers’ not recognizing a charge. One reason is that merchant identifiers often list a corporate name rather than a more familiar storefront name. Some experts say the problem is caused by a limited number of characters available for such records in the computers that banks use. (That is not the case with American Express.) Better identification would reduce the number of needless disputes.
• Debit cards, while not credit instruments, have evolved into a payment method that is used as easily as credit cards and often bear the Visa or MasterCard logo. But debit-card purchases have much weaker consumer safeguards than do credit-card purchases.
Consumers who seem to have a legitimate claim but have trouble getting charge-backs are not hard to find:
Edward Hug, a retired engineer from New London, Conn., says he lost $575 when AARP First USA Visa refused to correct duplicate billing of cash advances made while he was in Peru in 2001. Bank One, which owns the First USA brand and also issues credit cards under other company labels, says that after Consumer Reports inquired about the matter, it decided to accept Hug’s claim and send a $575 refund.
Rick Miller, a lawyer from Harker Heights, Texas, disputed a $29 charge on his Discover card for “AccountGuard” service that he said he never requested. Discover hit Miller with a $32 finance charge because he paid his balance in full except for the disputed $29, which is his right. Last July, a month and a half after Miller initially complained and after he asked the Texas attorney general to become involved, Discover removed the $61 in charges. Discover says that it never received Miller’s first letter and that the box Miller checked on a form to decline AccountGuard had been misconstrued as initials indicating his acceptance.
Michael Steiner, a Seattle ophthalmologist, kissed $3,500 goodbye when American Express refused to reverse a charge for jewelry he bought in Thailand in 2002 but immediately returned to the merchant. American Express says only that the case is complicated. Steiner had also charged $2,500 of the purchase to his Visa card from Bank of America, which gave him a charge-back with no problem.
How to fix Simple errors
Some billing errors can be addressed with a phone call to the credit-card company’s customer-service department. They include these problems:
Unfamiliar charges. Many consumers question their bills because the merchant identifier on the monthly statement shows a merchant’s corporate name rather than the store name. Bank One, which now gets the merchant on the phone with you, says it clears up 86 percent of these cases on the first call without a formal dispute’s being filed.
Clerical errors. Many are easily handled with a call to customer service.
Fraud. These errors tend to be fixed quickly because card issuers want to maintain your faith in the security of their cards. Besides, you pay for fraud in your finance charges and annual fees. If you suspect fraud, call customer service immediately, have your account closed, and open a new one. Follow up with a letter.
How to fix other errors
For other problems, you’ll need to write a dispute letter to your credit-card issuer. The letter preserves your right to dispute errors; a phone call may not. The credit-card issuer must receive your letter within 60 days from the statement date. Don’t send it with your bill, but rather to the address for disputes on the monthly statement. Include copies (not originals) of all documents supporting your claim. The card issuer should acknowledge your letter within 30 days of receipt.
Write a dispute letter if you have one of the following problems:
Unauthorized charges. These include automatic charges you authorized when you signed up with, say, an Internet service provider but have since canceled. Create a paper trail by telling such companies in writing that you’re canceling your service and immediately withdrawing authorization for further charges. Include a copy with your dispute letter to your credit-card company.
Cramming. This involves charges the credit-card issuer tacks on for insurance or other services it sells. In some cases, you “accept” the charge by not signing a fine-print refusal or bill stuffer. Immediately send a dispute letter telling the card issuer to refund the entire amount, not to prorate charges for the partial month during which you supposedly enjoyed the service.
Goods not delivered. In your letter, request proof from the card issuer that the item was delivered--something with your signature of receipt, not just a computer-generated delivery confirmation.
Failure to credit returned items. Sometimes merchants forget to credit you for returns. Get a receipt whenever you return something, so that you can send a copy of it along with your dispute.
Poor-quality merchandise. First, try to convince the merchant to exchange or take back the item. If it will take it back, get a signed receipt and ask that the purchase be credited to your card. If the merchant won’t, write a letter to the business via certified mail, return receipt requested, rejecting the item and stating when and where you tried to return it. Include a copy when you write your dispute letter to the card issuer. The regulations don’t provide much protection against poor-quality goods, so you should make a case that the item was not delivered as agreed and not accepted by you.
If your dispute letter is not getting you anywhere,consider writing to the card issuer's president, asking that your dispute be escalated. “Most companies have a section called ’escalations,’” says Dreifach, the New York assistant attorney general. A complaint to a state attorney or to the OCC may help.
If all else fails, you can pursue a refund in small-claims court. Most billing disputes qualify. For amounts that exceed the limits of small-claims court (limits vary by area), many big credit-card issuers require arbitration. There, the rules of allowable evidence may be set by an arbitrator paid in part by the credit-card issuer. You usually have no right to appeal an unfavorable ruling. Although arbitration is pitched as less formal than a regular court contest, you may be up against a lawyer for the credit-card issuer, so it's advisable to have your own attorney, too.
Toward better protection
The Federal Reserve Board is reviewing billing-dispute rules. Share your comments at http://www.federalreserve.gov/feedback.cfm. CU recommends these changes:
• Explicitly define or interpret disputes about quality as “billing errors.”
• Require card issuers that deny errors to notify consumers that they can complain about the decision to bank regulators, and include an address.
• Add a meaningful dollar penalty for credit-card issuers that fail to comply with the regulations if the consumer is forced to go to court and wins.
• Require that credit-card statements identify the merchant name in a manner easily recognizable to the consumer.
• Extend to debit cards all protections that cover credit cards.
Copyright © 2002-2008 Consumers Union of U.S., Inc.
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