Summary
- Chargebacks don’t directly affect your business credit score, but frequent disputes can raise your processing fees or get your merchant account shut down.
- Each chargeback costs time, money, and often a fee.
- High chargeback ratios can brand your business as high-risk, limiting your ability to work with certain payment processors.
- Preventing chargebacks through strong customer service and clear product descriptions protects your business and revenue.
When a customer disputes a charge made on their credit card or charge card directly with their card issuer, that dispute is labeled a "chargeback." Frequent chargebacks can raise your processing fees, get your business labeled as "high-risk," or even result in your merchant account being shut down entirely so you can no longer accept credit card payments.
Learn how chargebacks can affect your business, and steps you can take to help reduce the chances your business will be hurt by them.
Do chargebacks hurt your business credit profile?
Chargebacks don't appear on your business credit reports with major business credit bureaus like Equifax, Experian, or Dun & Bradstreet.
But just as your business credit reports and business credit scores are used as a way to evaluate risk, frequent chargebacks can put your business in a “high risk” category with your payment service provider.
What are the financial consequences of chargebacks?
Each chargeback can hurt your business multiple ways:
- Lost sale revenue: The full transaction amount often gets pulled from your account
- Lost merchandise: The customer usually keeps the product or service already received
- Chargeback fees: A business will often pay a fee of anywhere from $20–$100 per dispute, whether they win or lose the dispute
- Higher processing rates: Payment processors may increase rates for future transactions.
- Productivity losses: Gathering evidence and managing disputes can be time-consuming.
For every $100 in chargebacks, merchants lose an estimated $240–$360 total, according to research by Justt.
How a high chargeback ratio affects your merchant account
Your chargeback ratio is calculated as total chargebacks divided by total transactions. For example, if your business processes 1,000 transactions and receive 10 chargebacks, your ratio is 1%.
Sometimes the ratio is calculated by comparing the number of transactions and chargebacks in the current month, and sometimes it compares chargebacks in the current month to transactions in the previous month.
The high risk zone starts around 0.9%.
- Visa: 0.9% triggers the high-risk threshold in Visa’s Dispute Monitoring Program
- Mastercard: 100–299 transactions disputed and 1.50%–2.99% triggers its Excessive Chargeback Merchant program
What happens when you exceed these thresholds
Possible repercussions include:
- Monthly fines ranging from hundreds to thousands of dollars
- Increased per-transaction fees
- Required chargeback reduction plans
- Potential merchant account termination
Finding a new processor can be expensive and difficult
If your merchant account is terminated, you'll likely need to find a "high-risk" payment processor. You’re likely to pay much higher rates.
Even winning a chargeback dispute doesn't help your ratio. The initial filing permanently counts against your business.
How does a chargeback work?
There are five basic steps in the chargeback process:
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 contact their 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 ends. If valid, the process continues.
3. Customer gets reimbursed
The issuer processes the valid chargeback and provides the customer with a credit. Your merchant account gets debited for the charge plus a chargeback fee ranging from $15-$100.
4. Merchant receives the chargeback
You'll find out through your merchant account processor. The notification includes directions on how to respond.
5. Merchant responds and appeals
You can submit evidence and appeal the chargeback, or simply accept it. If you respond, you'll need to prove you provided the product or service. The appeal process can take weeks or longer, and it sometimes costs more than the original transaction value.
How to prevent chargebacks
Prevention beats winning disputes every time. Here are ways to help stop chargebacks before they start:
Provide excellent customer service
Focus on providing positive, respectful customer experiences. If someone is dissatisfied, reach out promptly to resolve the issue.
Make your contact information easy to find on every page of your website, order confirmations, and receipts.
Many customers file chargebacks simply because they couldn't reach you for help.
Maintain a clear and fair return policy
Clearly outline your return policy so it's easy to understand. A simple return process encourages customers to contact you directly instead of their bank.
Display your return policy prominently on your website, at checkout, and on receipts.
Use clear billing descriptors
If your business name is "Mike's Bike Shop," try to use as much of that name as possible on customer credit card statements. (Your merchant account will assign the static descriptor for your company, and you should also have the option of a dynamic descriptor where you can be more specific.)
Generic legal entity names or parent company names that customers don't recognize create confusion. This single change can eliminate many "unrecognized transaction" disputes.
Write detailed and accurate product descriptions
Give customers exactly what they expect. Use honest descriptions, specifications, and high-quality photos. This prevents "product not as described" disputes.
Don't make promises you can't keep. Set realistic expectations so customers know exactly what they're getting.
Provide accessible shipping and tracking information
Send order confirmations, shipping notifications, and tracking numbers immediately. Communicate expected delivery times and proactively inform customers of any delays.
This can help prevent customers from assuming an order is lost and filing a chargeback.
What is chargeback fraud?
Most chargebacks aren't from stolen credit cards. Instead, they're from your own legitimate customers. An estimated 75%–86% of chargebacks are what’s often referred to as "friendly fraud," where customers dispute legitimate charges.
Common reasons customers file chargebacks:
- Unrecognized charges: They don't recognize your business name on their statement
- Buyer's remorse: They regret the purchase and find chargebacks easier than returns
- Delivery issues: Package arrived late, was not delivered, or was stolen at delivery
- Forgotten subscriptions: They forgot about recurring charges
- Family purchases: Spouse, child, or family member made the purchase
Fighting back with evidence
If you believe a chargeback is friendly fraud, you can dispute it. Success depends on having strong evidence which may include:
- Proof of delivery with tracking and signatures
- Customer communications acknowledging the order
- Transaction verification showing correct billing information
- Signed contracts or service agreements
The key is organizing evidence clearly and meeting strict deadlines. You may only have a few weeks to dispute a chargeback, depending on the card network.