Why Credit Cards Have the Best Protection

Last Updated Jun 27, 2011 11:25 AM EDT

Federal laws offer protections for both debit and credit cards. Under regulations, both limit the liability for fraudulent charges to $50. Many card issuers also offer voluntary policies that offer similar protections for debit and credit cards. For additional protection your homeowners or renter's insurance policy may also cover up to $500 for losses from unauthorized charges on credit and debit cards.

But if you are going to use plastic for larger purchases, ongoing services or online purchases, then use credit cards. That's because under the Fair Credit Billing Act (FCBA), a federal law, only credit card holders have the right to dispute charges on their credit cards.

Unfortunately few consumers understand their responsibilities required to ensure the protections provided. While you can use the protections under the FCBA to help you avoid billing disputes, there are certain guidelines and time lines you need to follow.

Folks also should understand that under this law, none of the following procedures or protections applies to debit cards. Many consumers use their debit cards like credit cards these days. Debit cards even look like credit cards because they carry the MasterCard and Visa logos. Some debit cards offer similar protections, however, the most complete protections under federal laws are only offered to credit card users.

The following types of billing errors can be cleared up with a simple phone call instead of an official written dispute:

Clerical Errors: Mistakes such as an incorrect date or amount of a legitimate charge item can be easily changed over the phone.

Unfamiliar charges: Over half of all disputes arise from consumers not recognizing a charge. Usually, this is because the merchant's corporate name is displayed on the bill in place of the individual store name. People looking for a charge from a particular store will be confused by an unfamiliar corporate name. For example, the charge at the neighborhood car wash could show up under another name of the business owner on your card account statement.

Fraudulent charges: If a fraudulent charge does appear on your bill, companies are typically quick to address it because they want to maintain your faith in their card's security. Often they will research the transaction, and send you an affidavit stating that you sign and return stating that you did not authorize the charge.

All other billing problems or errors require you to send a written letter to your credit card company, stating that you are disputing the charges. Such errors might include:

  • Charges from an Internet service provider that you used in the past but have since cancelled their service,
  • "Cramming" or charges tacked on by the creditor such as insurance or other services they sell and you don't want,
  • A merchants failure to post a correct credit for returned items, or
  • Charges for services or goods that you ordered and never received.
But don't think you can automatically dispute and not pay for charges for poor-quality products they receive. Unfortunately, that's not covered under the FCBA. Goods "not delivered as agreed" are covered by the law and can be disputed for a refund. However, the law does not cover poor-quality goods. That's because poor-quality goods are not seen as an "error" on your bill. If you hope to receive a refund, you must return the product and frame your dispute as being about a product or service that wasn't delivered as agreed. This may seem like a fine line, but this is your best bet for getting your money back according to Consumer Reports and the Federal Trade Commission.

Check back in a few days when I'll write about the process for submitting a billing dispute.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.