When is a charge on a credit card unauthorized?
If the charge comes from a merchant you're familiar with, the definition of 'unauthorized' can become murky
Fred O. Williams is senior reporter for CreditCards.com. A business journalist since 1987, his work has appeared in Kiplinger's Personal Finance magazine, the Buffalo News and USA Today.
When a merchant you deal with on a recurring basis makes an unexpected charge, is it unauthorized?
Unauthorized charges are forbidden, but when you deal with a company on an ongoing basis, what is and is not authorized can get murky. Let’s analyze the issue in further detail.
Two recent questions from readers about unexpected charges raised the issue of gray areas around authorized credit card charges.
- One cardholder was upset that a recurring charge for dental insurance went from $33 a month to $121 a month, without notice.
- Another cardholder said a hospital that treated his wife – and to which the couple owes money – notified him it would put an additional charge on his wife’s credit card.
Both questions touch on a central issue: When is a charge on a credit card unauthorized?
When an unwanted charge is illegal
Unauthorized charges on credit cards and bank accounts are forbidden, but when you deal with a company on an ongoing basis, what is and is not authorized can get murky.
Regulations against unauthorized use of a credit card draw a line between outright fraud and legitimate merchants that you deal with on a recurring basis.
Unauthorized use “means the use of a credit card by a person, other than the cardholder, who does not have actual, implied or apparent authority for such use, and from which the cardholder receives no benefit,” according to regulations in the Truth in Lending Act.
Rules around recurring charges
What’s permitted with recurring charges? It comes down to the agreement between you and the company about pre-authorized charges, experts say.
“It’s a little different than a checking account – you have to look at the contract,” says Nessa Feddis, senior vice president at the American Bankers Association.
When a service has variable amounts due, the agreement governing recurring payments normally reflects this.
In the recurring payment agreement for Geico’s auto insurance policy, for example, this language appears: “You understand that changes to your policy or premium may change the amount debited.”
The Geico agreement goes on to state that you can stop automatic payments at any time, and provides instructions on how to do it. The sweetener for authorizing the recurring payment is a break on installment fees for dividing the annual premium into periodic chunks.
What about notification? This isn’t legally required for charging credit cards, but most companies do send notifications, Feddis said. These notifications can wind up in your email junk folder or spam trap.
Options when a recurring charge increases dramatically
If a company lures you in with a low initial payment and then quietly jacks up a recurring charge, you have options.
You have the right to dispute charges you feel are unfair. Under the Fair Credit Billing Act, you have 60 days after the bill is sent to file a dispute. You can withhold the disputed payment during the dispute investigation. The card issuer cannot charge interest or fees during the investigation and cannot report the bill as unpaid to a credit bureau.
Checking your monthly statement carefully is the first step in protecting yourself from unwanted recurring charges. In the case of subscriptions or insurance premiums, bills are usually due before the service period starts. That gives you the option of canceling when the statement arrives if you don’t like the new price.
When a recurring charge increases, it may be easy to convince the card issuer to charge back the increased portion of the previous bills from that merchant.
I tested this. After I was charged a 25 percent increase in monthly internet charges, I called Citi. All it took was one call to customer service to get that 25 percent fee returned to me as a chargeback. I also called the internet service provider to ask about the fee increase.
When pre-authorized charges are allowed
A store, restaurant or even a hospital cannot simply put a new charge on a card you used previously without your authorization, consumer law experts said, even if you owe money to the merchant or service provider.
The reader who received notice that the hospital was going to put a charge on the card could dispute the fee – if the hospital went ahead with it against his instructions.
Medical providers might take steps to collect overdue bills, but putting charges on a card they happen to have on file is not one of them.
In the case of medical providers, however, patients sometimes authorize an open charge when it isn’t clear how much of the bill will be covered by insurance.
Mike Townsend, public relations director at American Bankers Association, said he ran into this with a family member’s doctor bill.
“She didn’t have insurance on file – they charged me a month later for the copay,” he said. The delay gave time for the insurance coverage to chip in. “They sent me an email a couple of weeks before,” Townsend said.
If you feel a company has abused such a pre-authorized transaction agreement, you have the option of disputing the charge to the card company. “The credit card charge will go back to the merchant – they’ll have to show it is authorized,” Feddis said.
If not, they are liable for a chargeback, crediting you for the amount. After too many chargebacks, the company can be booted from using the credit card transaction network.
Protections clearer with checking accounts
When charges are made to a checking account, the protections for consumers are firmer. Under the Electronic Fund Transfer Act, companies must notify you before making a deduction from your bank account.
The regulations require recurring payments to be set out in a written agreement. “If they go beyond it, it’s unauthorized,” said Lauren Saunders, associate director of the National Consumer Law Center.
The rules require notification before each payment is deducted. The account holder has the right to stop payments, among other legal safeguards.
Companies that ignore your instructions to stop debiting your account are headed for trouble.
- Unauthorized withdrawals are among the charges filed in late April against Lending Club by the U.S. Federal Trade Commission. The regulator sued the loan company for misleading statements about fees.
- The lawsuit also charges that Lending Club took double payments from consumers’ bank accounts and sometimes ignored instructions to stop taking automatic payments from accounts, or continued to take payments after the loan was paid off.
If your situation isn’t part of a Federal Trade Commission crackdown, talk to your bank about halting unwanted debits on your account and getting your money back.
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