One might think, what an odd combination, Credit score and disputes. For most of us, it might not make sense as the standard belief is that if you are late on your loan or credit card payments, the score takes a hit. And that it is a testament to the financial behaviour pattern of an individual. Rightly so, even a chargeback raised by a cardholder is a financial behavior indicator.
Before we get into the credit score hit, let’s understand the basics of disputes.
A dispute or chargeback is a grievance raised by the cardholder aka customer with their issuing bank against an online transaction. And there are many kinds of disputes namely friendly fraud, criminal fraud, consumer disputes and processing errors.
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While processing errors are likely to be technical errors that can be set right and consumer disputes warrant a conversation between the merchant and cardholder, so is not the case for friendly and criminal fraud. And another obstacle is that often customer disputes are confused with friendly fraud.
Any dispute that comes under friendly fraud has one clear distinction, that the transaction has happened legitimately, and the cardholder has no intention of bearing the cost. While a dispute that comes under criminal fraud, happens when the cardholder’s details are hacked by illegal elements.
Let me elaborate a bit more
Mr X’s wife has made a hefty purchase at a popular online site without his knowledge. When receiving the bill, Mr X immediately disputes the charge saying that he has not made the purchase as it was not authorized by him. This dispute triggers the usual routine of chargeback notification to the merchant via card network and acquirer. The merchant immediately begins gathering all evidence that supports their case proving that the purchase was intentional and legitimate.
Now coming back to the credit score report, this disputed charge will be informed to the credit bureau with the notation that this cardholder’s account is under dispute.
In this circumstance, there are two outcomes.
Outcome 1: If this is a one-time charge and the due date for the credit card bill is nearing,
- The bank will either hold the disputed amount or decrease the bill
- Or issue a provisional credit that will balance the debited amount
In this outcome, if the bank does not credit the disputed amount, the cardholder is liable to pay the entire bill. If they fail to do so, that action will be notified to the credit bureau portraying the cardholder as a defaulter which also lowers the credit score.
Outcome 2: The potential lender might consider this dispute notation as an errant financial behaviour if this is a frequent occurrence because there will be a considerable dip in the credit score.
In outcome 2, there is also another consequence to consider, if the cardholder crosses a threshold of disputes, he can raise, he will become a hot-listed customer and be noted as a person who has a penchant to do friendly fraud. This note will also lead to a dip in the credit score as it indicates financial behaviour.
The case of criminal fraud.
Here the card credentials are stolen, and the cardholder has no idea about it. Let’s take Mr X again as an example.
Mr X lives in Mumbai and the card is swiped in Singapore for Rs.50,000, then Mr X will immediately call his bank to dispute the charge and block the card. Here, the bank will behave in the same way, wherein they will block the card and immediately issue a provisional credit. If not, Mr X must pay the whole amount to avoid being branded as a defaulter.
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In either of these scenarios, there is an impact on the credit score. So, one can argue that the onus rests on the consumer to be properly aware of the dispute. But here’s a different perspective on the same.
For example, a technological trigger that alerts the issuer that a dispute is not a friendly fraud but a consumer dispute while the cardholder is filing a complaint can help them resolve the problem with the merchant instead of the bank. In case the cardholder has a habit of filing chargebacks too often, technology can help the issuer identify them in the initial stage and take proper measures to educate their customer.
In conclusion, we fail to take into account the amount of resources it would take to educate billions of cardholders. But, if millions of banks undergo the much-needed digital transformation, it would help the cardholder protect their credit score from plummeting.
This column has been written by Praveen Krishna Dev, CEO, Backspace Tech
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of https://www.financialexpress.com)