Credit Card vs. Debit Card Chargeback - The Difference Explained

I’ve dealt with both chargeback types as an e-commerce store owner. I want to help you understand the differences between both chargeback types to better prepare your business for when they occur.

I’ll compare the main differences between each chargeback type. Afterward, I’ll explain each chargeback type, their processes, and how to deal with them (as a business).

Let’s dive on in.

Key Takeaways

• Credit card chargebacks are faster for customers with temporary holds.
• Debit cards freeze funds immediately upon a dispute.
• Stricter deadlines apply to debit card chargeback disputes.
• Credit card chargebacks shift more liability to businesses.
• Clear communication helps reduce debit and credit card chargebacks.

What Are the Differences Between Credit Card & Debit Card Chargebacks?

Here are the main differences between credit and debit card chargebacks:

Chargeback fees for merchants are the same on debit and credit card chargebacks ($20–$500). Merchants will deal with debit card chargebacks the same way they would with ones used by credit cards.

Gather and provide evidence within the bank’s timeline.

The following sections will dive further into the differences between these chargeback types.

Learn the differences between these chargeback types and learn how to respond to each.

1. Regulations

The following sets of regulations govern disputes:

Let’s break down what each of these regulations are:

Regulation E (Electronic Funds Transfer Act) is a federal law that protects consumers who use electronic payment methods. Including debit and prepaid cards.

It outlines consumer rights and responsibilities regarding unauthorized transactions, errors, and disputes. I'll talk about these throughout the following sections.

Regulation Z (Truth in Lending Act) is part of the broader Consumer Credit Protection Act.

This act aims to ensure fairness in credit transactions. It provides rules for disclosing credit terms, billing rights, and how to handle disputes, including chargebacks on credit cards. 

Regulation Z offers credit card holders greater protection. Potentially reducing merchant liability.

Card networks (Visa, Mastercard, etc.) have rules for handling chargebacks, known as "chargeback reason codes."

These regulations add another layer to dispute resolution, establishing deadlines, and required documentation. It also determines responsibility for fraud between merchants, banks, and cardholders.

Summary: Different regulations govern debit vs. credit card chargebacks, impacting merchant liability and response times. Understanding these regulations helps businesses minimize chargeback losses.

2. Funds Availability

When a customer pays with a credit card, you receive payment as you normally would.

The difference lies in how the purchase was financed.

With credit cards, the customer isn't using their own money. The bank essentially loans them the funds and the customer pays the balance later.

Meanwhile, debit cards deduct the money directly from the customer's checking account.

If a customer successfully disputes a credit card transaction, the immediate financial impact on your business is less severe. The bank might issue a provisional credit, returning the money to the customer while investigating, but you haven't directly lost funds yet.

Debit cards are a different ballgame.

Since the disputed money came directly from a customer's checking account, the bank will often freeze the equivalent amount in your merchant account as a safeguard. This means you lose access to those funds during the investigation, potentially causing cash flow issues.

Summary: Credit card chargebacks can delay your revenue, while debit card chargebacks often create an immediate cash flow problem.

3. Types of Disputes

The types of disputes a customer can file—and your chances of winning those disputes—differ based on whether they used a credit or a debit card. This is because US federal regulations offer varying protection depending on the card type.

Here are the disputes different regulations cover:

1. Regulation Z (Credit Cards): This regulation provides strong safeguards for consumers using credit cards [1].

Common reasons for disputes include:

• Unauthorized charges: The customer didn't authorize the transaction (fraud).
• Goods/services not received: The customer paid but never received what they ordered.
• Incorrect charges: The amount billed is wrong, or there are duplicate charges.
• Quality disputes: The goods were faulty or not as described.

2. Regulation E (Debit Cards): Regulation E is more limited in scope. Debit card chargebacks usually center around unauthorized charges [2]. When someone uses the customer’s debit card without their permission.

Banks may offer additional protections for debit card holders beyond the legal minimum. Always check with your merchant account provider for the specific chargeback rules that apply to your business.

Summary: Credit cards have broader dispute options than debit cards due to regulations. Debit card disputes often focus on unauthorized charges only.

4. Cardholder Liability Cap (Important for Consumers)

Federal law caps a credit card holder's liability for unauthorized charges at $50. Many credit card issuers go further and offer zero-liability policies. Protecting cardholders from fraudulent charges.

The rules get trickier for debit cards.

A cardholder's liability depends on how quickly they report the fraud. If they notify the bank within 2 days, their maximum loss is $50. Beyond that, liability can increase to $500 [3]. Or become unlimited.

Though the liability cap mainly falls on the consumer and their bank, it indirectly affects businesses. If a debit card customer is liable for unauthorized charges, they might be less likely to initiate a chargeback. Reducing your administrative burden.

Being aware of liability differences can help you (the merchant) explain them to customers. This explanation builds trust, especially with those concerned about online purchases. It may encourage them to choose credit cards over debit, which could benefit you.

Here’s an example to illustrate this information (for consumers):

Your wallet gets stolen. You won't lose any money if you report your missing credit card immediately. But, if you wait a week to notice your debit card is gone, you could be on the hook for hundreds of dollars in fake charges.

Summary: Credit cards generally offer stronger liability protection for unauthorized charges than debit cards.

What’s a Credit Card Chargeback?

A credit card chargeback is when a cardholder disputes a transaction with their bank (the issuing bank). If the bank rules in the cardholder's favor, it forces a refund, pulling the money directly from the merchant's account.

Credit card chargebacks often result in a faster refund for the cardholder. The issuing bank provides a provisional credit while investigating the dispute. Debit card chargebacks can take longer, with the money unavailable to the consumer until the bank resolves the investigation.

What’s a provisional credit?

It’s when the bank immediately puts the disputed amount back into the customer's account, while they investigate who's right. You (the business) or the customer. This means the money you earned from the sale disappears from your account until the chargeback is settled.

Merchants typically shoulder more liability with credit card chargebacks. Banks are more likely to favor the consumer with credit transactions due to stronger consumer protection regulations.

Here’s a visual:

A customer buys a product online with a credit card but claims they have yet to receive it. They initiate a chargeback, and the bank provisionally refunds their money. If the merchant can't prove delivery, they lose the revenue and the product's cost.

Summary: Credit card chargebacks provide faster refunds for consumers and generally shift more liability to the merchant. Debit card chargebacks might take longer to resolve and could have less financial impact on businesses.

How a Credit Card Chargeback Works

Here’s how a credit card chargeback pans out:

• Customer Complaint: The customer contacts their bank (the issuing bank) to dispute a charge on their credit card statement. This might be due to fraud, goods not received, or some billing disagreement.
• Provisional Credit: Here's the first major difference. With credit cards, the bank usually grants a provisional credit to the customer immediately. The disputed amount temporarily reappears in their account while the bank investigates the situation.
• Chargeback Request: The issuing bank then sends a chargeback request to your bank (the acquiring bank), putting the ball in your court to provide proof the transaction was legitimate.
• Dispute the Chargeback: Gather evidence like receipts, delivery confirmations, or any communication with the customer that supports the validity of the charge.
• Network Mediation (Possible): If the banks can't reach an agreement, the case may escalate to the card network (Visa, Mastercard, etc.). They will act as a mediator and make a final decision based on the evidence presented.
• Outcome and Impact: If the chargeback is successful, the disputed amount is permanently taken from your account, and the customer keeps the money. Unlike debit cards, this deduction happened earlier with the provisional credit.

Credit cards grant immediate refunds to the customer (provisional credit). Whereas debit cards only freeze the money while investigating.

Summary: Credit card chargebacks start with the customer receiving immediate reimbursement. Merchants then must prove the transaction was valid to avoid a loss.

How to Deal with a Credit Card Chargeback (As a Merchant)

Here's how to handle a credit card chargeback as a merchant:

1. Respond Quickly: Most have a limited window to respond to a chargeback (often 14–21 days). The quicker you react, the better chance you have of gathering evidence and building a strong case.
2. Identify the Reason: Understanding the reason for the chargeback (e.g., fraud, non-receipt of goods) is crucial. This helps you determine the documents you need to collect for your rebuttal.
3. Gather Evidence: Collect any documentation that proves the legitimacy of the transaction. This might include receipts, communication with the customer (emails), or customer agreements.
4. Craft a Compelling Response: Write a rebuttal letter explaining why the chargeback is invalid.
5. Submit to Your Bank: Follow your bank's instructions to submit your rebuttal and evidence within the designated timeframe.
6. Follow Up (Optional): Stay in touch with your bank for updates.

Prevention is key. Clear communication, detailed records, and a well-defined return policy can help minimize chargebacks in the first place.

Summary: When facing a chargeback, respond fast and gather strong evidence. Submit a detailed rebuttal along with your proof to the bank.

What Is a Debit Card Chargeback?

A debit card chargeback is a process where you can reverse a fraudulent or disputed transaction on a debit card. Unlike a typical refund where the consumer works directly with the merchant, a chargeback involves the consumer’s bank taking action on their behalf. 

When a customer initiates a debit card chargeback, the disputed amount freezes in their account immediately. This action means the money is unavailable while the investigation is ongoing.

With a credit card chargeback, the funds usually remain available in the consumer’s account throughout the dispute process.

Summary: A debit card chargeback reverses a fraudulent or disputed purchase. It differs in immediacy of fund removal and liability limits.

How Does a Debit Card Chargeback Work?

Here’s what happens during a debit card chargeback:

1. Customer Contact: The customer contacts their bank claiming fraud or an error on a purchase from your business.
2. Funds Frozen: Unlike credit cards, the bank often freezes the disputed amount in your merchant account immediately, reducing your available funds.
3. Chargeback Request (Optional): The bank may contact you to verify the transaction. If the customer pursues a chargeback, your bank receives a formal request.
4. Dispute the Chargeback (Optional): You have the opportunity to dispute the chargeback with evidence proving the transaction's legitimacy (e.g., receipt, signed authorization).
5. Network Mediates (Possible): If no agreement is reached, the card network (Visa, Mastercard) may mediate based on evidence provided by both sides.
6. Outcome and Impact: The bank will notify you and the customer of the decision. A successful chargeback means the funds are deducted from your account and returned to the customer.

Debit card funds are frozen immediately, impacting your cash flow. Meanwhile, credit card funds typically remain available during the dispute.

Summary: Debit card chargebacks impact cash flow and have stricter deadlines for businesses. Prevention and quick response are key to minimize losses.

How to Deal with a Debit Card Chargeback (As a Merchant)

While similar to credit card chargebacks, debit card situations require different tactics:

• Faster Action: Debit card chargebacks often result in immediate frozen funds in your account, unlike credit cards with provisional credits. Respond quicker (within days) to minimize financial strain.
• Evidence is Crucial: Gather everything that proves the transaction's legitimacy (receipts, delivery confirmations, communication).
• Dispute Window Might Differ: Deadlines to dispute debit card chargebacks can vary from credit cards. Check with your bank for the specific timeframe to submit your rebuttal.
• Follow Up and Prevention: The remaining steps (follow-up with the bank, considering network mediation) are similar to credit card chargebacks.

Clear communication, detailed records, and a defined return policy can reduce debit card chargebacks as well.

Summary: The way that debit card chargebacks work are almost identical to credit card chargebacks. The main difference is provisional credits versus immediately freezing funds in accounts.

FAQs for Debit vs. Credit Card Chargebacks

Explore the sections below to find frequently asked questions about debit card and credit card chargebacks.

Do Debit or Credit Cards Have the Highest Chargeback-To-Transaction Ratio?

Credit cards had a chargeback-to-transaction ratio of 7.19% according to the analysis of bank identification number (BIN) data [4]. Debit cards had a ratio of 5.93%. This means more cardholders dispute credit card transactions.

Conclusion

Debit card disputes demand swift action to avoid losing funds and have tight liability windows. Credit card chargebacks favor the consumer with provisional refunds, placing the burden of proof on businesses. The way you’ll deal with both (as a business) are identical.

If you don’t want disputes to escalate into chargebacks, you’ll need help. Learn how our tool can help.