I recently read an article about a gentleman who bought a new kitchen – for the purpose of this article we'll call him ‘Paul'. Paul paid up-front for his purchase over the course of three instalments, each well over £3,000. After paying the final instalment, Paul was shocked to discover that the kitchen company had gone into administration and he was over £10,000 out of pocket – without even a new sink to show for it.
Now, for such a large transaction Paul had decided not to use his debit card, but had opted to use his charge card – a card usually favoured by high earners / high spenders since it comes with an annual fee in return for the many perks and benefits it offers such as travel insurance and rewards programs (the Amex gold, platinum, and black cards, for example, are all charge cards).
Charge cards work like credit cards only in the sense that money spent on them is not taken directly from your bank account, as it would be using a debit card, but is paid off at the end of the month instead. However, it's important to remember that charge cards do not offer credit to the consumer and consequently, there is no spending limit, no minimum re-payment amount each month, and no interest rate. You can spend as much as you want on a charge card, but you have to pay your bill in full every month.
It is for this reason that charge cards are not covered by Section 75 of the Consumer Credit Act – a law which was passed in the UK meaning your credit provider must take the same responsibility as the retailer should something go wrong with a purchase. In other words: Paul's card scheme would have had to refund the money that the kitchen company could not if he paid for the kitchen using a credit card … However, Paul had used a charge card.
Now, Paul didn't make this error knowingly, and the purpose of this article is to help others not to make the same blunder. Paul mistakenly believed that his charge card carried the same purchase protection as did his credit cards, after all, they carry so many other benefits and privileges that most cards don't have. However, this is not the case. So that we are all clear, here are the main differences between your credit card and your charge card:
- A credit card's main function is to spread the cost of your purchases, and you can therefore pay a minimum amount off the balance each month. Charge cards do not offer credit. You must pay in full each month or face very large fines and cancellation.
- Credit cards are risk-based and cap spending based on the consumer's credit score and earnings. Charge cards do not cap spending. No interest is charged because the balance must always be paid in full every month (although you will have to earn over a certain amount to obtain a charge card).
- Usually credit cards will not charge an annual usage fee (although premium cards are available these are not the norm). Charge cards carry an annual usage fee which varies, as do the benefits and perks that come along with owning one.
- Under Section 75 of the Consumer Credit Act 1974, a credit card issuer is jointly liable for any breach of contract or misrepresentation by the retailer or trader. This means that, using a credit card, the card issuer is just as responsible as the retailer or trader for the goods or service supplied, allowing you to also put your claim to the credit card company should something go wrong or purchases arrive faulty or damaged. This right is particularly useful if the retailer or trader has gone bust, or it doesn't respond to your trying to make contact (section 75 of the Consumer Credit Act also applies to foreign transactions as well as goods bought online, by telephone or mail order for delivery to the UK from overseas). Using a charge card, purchases are not protected by Section 75 of the Consumer Credit Act, but they might be covered by chargeback. This covers purchases over £10 for 120 days after a problem arising the same as it does for debit card purchases.
Chargeback? What's that?
American Express, Visa and MasterCard, for example, all have chargeback schemes which enable customers to claim for a refund within 120 days of discovering there's a problem with their purchase. Unlike Section 75, however, it is very important to remember that this is a voluntary scheme to which the bank providing your charge card or debit card can sign up to. It is therefore not quite as secure as the protection offered by credit cards, although most major providers will adhere to it, especially where smaller amounts are in question.
Chargeback does not mean there is joint liability between the card scheme and the retailer (or as we would call them in the industry: the “merchant”). Claims must be addressed to the bank that provides your debit or credit card, which in turn will put in a request to the merchant's bank for the funds. As a result, you could get your money back from the merchant's bank … if the money is there to be recovered. Unfortunately for Paul, however, he will likely never receive his £10,000 back in full since the merchant – having gone bankrupt – would not have the funds.
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