Don't Lose Money When Companies Collapse

When it comes to paying for goods in advance, or leaving a deposit, some payment methods are safer than others. Here's how to stay secure.

As the UK slides deeper into recession, more and more companies are going to the wall. Recent high-profile victims on the high street include Adams, Land of Leather, MFI, Officers Club, Whittard of Chelsea, Woolworths and zavvi (formerly Virgin Megastores).

Alas, customers of these and other failed firms have discovered that some payment methods are safer than others when it comes to getting their money back. Hence, here's our quick guide to payment methods and their relative security:

Credit cards

There's a good reason why I always pay for goods costing between £100 and £30,000 using a credit card, especially if I'm ordering online or from an overseas supplier: Section 75 of the Consumer Credit Act (alias `s.75').

Under s.75, when you pay for goods in full or in part using a credit card, then you enter into what's called a `debtor-creditor-supplier arrangement'. In such a contract, the supplier of credit (in this case, your credit-card issuer) is said to `stand in the supplier's shoes'. In other words, it is jointly liable with the supplier if goods aren't delivered, are faulty, aren't as described and so on.

So, if a company fails to fulfil its duties to you under the Sale of Goods Act, then you can turn to your plastic for reimbursement. Also, it's important to note that your entire loss is covered under s.75, and not merely the deposit paid by credit card. For example, if you paid a deposit of £1 by credit card and a balance of £999 in cash, then you can claim the entire £1,000 from your card issuer.

Credit-card cheques

Credit-card cheques are not covered by s.75, plus I've heard many horror stories from readers who have been caught out by using them. For example, how would you feel if you paid a builder £8,000 by credit-card cheque, only for him to do a runner, leaving you in the lurch and out of pocket? Thus, I'd steer clear of using credit-card cheques to pay for items large or small -- especially as most charge a `handling fee' of 3% of each cheque's value, plus extortionate rate of interest!

Debit cards

Sadly, s.75 does not apply to debit cards, which is why my debit card is mostly used for withdrawing cash. If you pay by debit card for goods which never arrive, then you join the queue of a collapsed company's creditors (those people to whom a bust firm owes money). However, Visa operates its own refund scheme for Visa-branded debit cards, known as chargeback. Complain to your card issuer and it will reclaim your loss via the Visa network. However, this should be considered a last resort, as it's not as straightforward as making an s.75 claim on a credit card.

Cash

Except on very rare occasions, I never pay in advance for goods using cash and avoid leaving a cash deposit. This is because I would be considered an `unsecured creditor' if a company went bust. In this situation, I'd be highly unlikely to get my money back in full. Indeed, I might end up with just a few pennies in the pound if a supplier blew up. Hence, I keep my cash in my savings account or in my pocket, rather than in a company's bank account.

Cheques

Your rights when paying by cheque are similar to those when paying by cash: not much at all. If a company goes bust within days of you writing a cheque, then your bank may be able to `put a stop on' the cheque. Then again, this is pretty unlikely, so I wouldn't count on it. In any event, paying by cheque is on the wane, with several major retail chains no longer accepting cheques.

Bank transfers and the like

Bank transfers fall into the same bracket as cash and cheques: once sent, this money is very difficult to recover from a failed firm. Hence, I'd politely decline any request for an upfront payment of this kind, unless you are 100% confident that a supplier is absolutely rock-steady.

Book tokens and store vouchers

As an avid reader, I'm always a happy recipient of book tokens. Recently, I found £50 of book tokens in a pile of unsorted paperwork -- a forgotten gift from several Christmases ago. Officially known as `National Book Token gift vouchers', they have no expiry date and are valid in over three thousand outlets. Hence, for flexibility and ease of use, they are my favourite form of gift voucher and ideal for the January sales...

On the other hand, the vouchers sold by most retail groups are more restrictive: most have an expiry date, plus they can be used only in certain branded outlets. Hence, I'm not a huge fan of retail gift vouchers, apart from those from big-name brands such as Marks & Spencer and Next. In addition, gift vouchers may be impossible to redeem if a retailer goes under.

For example, thousands of zavvi customers have discovered that vouchers and gift cards issued by the chain before 27 November are no longer valid and may be worth a fraction of their face value. To claim a refund for zavvi vouchers, submit a claim to the administrators and keep your fingers crossed. For more information, read this message from zavvi.

In summary, sensible use of your credit card is the Foolish way to maximise your consumer protection when buying goods costing £100 or more. For the record, one of my Fool colleagues used his credit card to buy a car, in order to claim over £150 of cashback!

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