Warning! Don’t use PayPal to pay on a credit card
You’re losing valuable Section 75 rights
An ever-growing number of retailers now encourage customers to pay via PayPal, but if you're doing it on a credit card – for items that cost £100+ – you're missing out on valuable extra protection. That's because using PayPal scuppers your Section 75 rights. I'm hearing more reports of people falling foul of this, so I want to use this short guide to run you through how it works.
What is Section 75?
Before I explain the issue with PayPal, it's first worth understanding the rights it scuppers.
Section 75 of the Consumer Credit Act 1974 says if you pay for something costing between £100 and £30,000, specifically on a credit card, the card company is jointly liable with the retailer.
- This doesn’t just protect you if the store goes bust. As it’s ‘jointly liable’, you can go straight to the credit card firm if the shop goes bust, doesn’t deliver, is abroad, or is just a pain in the bum to get in touch with.
While card firms may try to fob you off by telling you to speak to the store, you can reply: “No. My rights are identical with you. I want you to sort it.” For full help and free templates for doing this, see our Section 75 guide.
- You have identical rights as at the store. In other words, if what you've bought is faulty, broken or doesn’t arrive, the credit card firm is obliged to put you right (see the Consumer Rights guide for exact definitions). Of course, if you just want a replacement or exchange and can go to the store, you may as well, as it's easier.
- This protection doesn’t apply to other cards or cash. It’s important to note this protection only applies to purchases with credit cards, not debit cards (here you may be entitled to the lesser chargeback protection), cash, cheques, or prepaid cards. That's because the concept behind Section 75 is to ensure you aren’t getting in debt for faulty products.
- As long as you pay 1p on the credit card, you’re fully protected. While the goods have to cost between £100 and £30,000, you don’t have to pay the full amount on a credit card. If you pay any amount on the card, and the rest in cash or on a debit card, the credit card firm is legally liable for the entire amount, as our ‘I got £23,000 back after paying just £200 on a card’ article demonstrates.
- Using Section 75 makes disputes easier. If you have a dispute with a retailer, you’ll often need to take it to court to force it to sort it out. Yet with a credit card company, even if it’s a consumer rights dispute, you can take it to the free Financial Ombudsman Service. If your credit card company doesn't accept your claim and you don't want to wait eight weeks from your original complaint to take it to the Ombudsman, you can request a 'letter of deadlock' from the retailer - that way, you can take your complaint to the Financial Ombudsman straight away.
The advantage is that, while the courts will only judge based on the law, the Ombudsman can also consider ‘standard industry practice’ and the beautifully nebulous concept of whether ‘you have been treated fairly’.
For more on how the rules work and help claiming, see the full Section 75 guide.
What’s the problem with PayPal?
Section 75 applies where there is a ‘direct relationship’ between a debt and the product. Typical examples include credit card purchases, specific car finance, store cards and credit from stores for products.
It doesn’t apply to indirect relationships. An obvious example: if you get a loan and use the cash it gives you to pay for a car, you won't be covered. Also excluded is paying via an agency; the crucial direct relationship is broken.
Traditional payment processors act as a way for the retailer to receive its money. But with PayPal, in simple terms, you’re paying PayPal and it's paying the retailer. Therefore, even if you’re just putting your credit card details into PayPal to pay, it counts as an agency, the path is broken, therefore you don’t have Section 75 protection.
That’s my simplified explanation, here’s one from the Financial Ombudsman when I asked it to confirm:
"Although PayPal appears as the merchant on the cardholder's statement, it cannot be seen as the supplier in a debtor-creditor-supplier agreement under Section 75 because it merely acts as the payment intermediary by transferring the money from the buyer's account to the seller's account. Therefore it breaks that chain to be considered under Section 75."
Does that mean I’m completely unprotected if I buy via PayPal?
No. You have standard consumer rights from the retailer, and PayPal has its own buyer protection scheme – in itself that’s not too bad, yet it is inferior to Section 75.
First of all, PayPal protection isn’t the law – it's just the companies internal code; second, there are timing restrictions; and third, it only applies to 'misdescriptions' or misdelivery, as opposed to the much meatier SAD FART consumer rights rules you get via Section 75.
So if you have the option to pay via credit card for goods over £100 direct rather than through PayPal, at no extra cost, that's the better route. If not though, and something goes wrong, it’s still worth trying the PayPal protection.
Does PayPal ever work for Section 75?
There could be circumstances where the necessary relationship may exist. For example, larger retailers may use it as a “merchant acquiring service”, which means it acts as a traditional payment processor. Yet, it's very difficult to tell – so to be on the safe side, assume not.
If you’re going to get really nerdy on this (ignore this bit if you don’t want nerd-dom), it’s worth noting there are some court rulings which can be read as contradicting the Ombudsman’s view. In other words, that Section 75 does apply to PayPal, most notably if the retailer has entered into a commercial entity agreement with PayPal.
Yet to push that you’d need to go to court. While there's a chance a card firm may just pay out if you did take it to the small claims court, equally true is it may decide to fight it all the way, which could be time consuming and potentially costly.
As the Ombudsman route is easier (and allows you to go to court after if you don’t like what it says, but it doesn’t work the other way round) my preference is to stick with it – which means following its interpretation, which is pretty clear that in most cases it won’t uphold Section 75 claims via PayPal.
In 2016, PayPal introduced Paypal Credit in the UK: a digital line of credit you can add to your PayPal wallet. Using funds from this pot to pay online gives you both PayPal protection and Section 75 coverage.
If an online retailer accepts PayPal as a form of payment, it should accept PayPal Credit. Do check though as not all retailers are covered.
As with all credit card applications, it will impact your credit score, so make sure you're in the right position to apply.
Credit limits are between £250 and £8,000, but its 0% offer ends after only 4 months (although this automatically restarts with every purchase over £150 you make using PayPal Credit). If you've not paid off within 4 months, APR jumps to 17.9%. So if you think something will take you longer than 4 months to pay off, you'd be better off using a 0% credit card instead.
Does chargeback work on PayPal transactions?
Chargeback is a lesser protection than Section 75, but it works both on debit and credit cards, and has no minimum amount (except on Mastercard where it’s £10). See the full how chargeback works guide for full information.
Unlike Section 75, which is legal protection, chargeback is simply a rule of the card payment processor (ie, Visa, Mastercard or Amex) which the banks who sign up to it must agree to. So I asked Visa and Mastercard how it works in regards to PayPal.
The answer depends on how you make the transaction.
- If you use a card to load money into your account. If you use your credit or debit card to load money into your PayPal account, and you make a purchase using the pre-loaded money, it's not covered by chargeback as it's not considered to be a card transaction.
- If your card is used directly through PayPal. If there’s no money loaded and your card is used directly to make a transaction through PayPal then chargeback should apply.
Visa suggests if you are making a card purchase through PayPal it's best to empty your account beforehand so there's no balance. That will make it easier for your bank or credit card provider to match the purchase with the debit. Mastercard says that its chargeback rules work the same as Visa's.
What are the best cards to use?
Any credit card gives you this protection, yet of course unless you pay it off IN FULL every month, there'll be interest charged that can be very expensive. If you're just doing it for the protection, then you may as well get a top cashback card, which pays you to spend on it. However, if you'll be borrowing as well (be careful), get a top 0% purchases card.
Is there anywhere else that Section 75 doesn’t work?
This isn’t just PayPal, it's any agency. Another big one is if you buy goods on a credit card from Amazon third-party sellers listed with the company name you're buying it from (as opposed to buying goods which Amazon directly sells itself, clearly listed as 'dispatched from and sold by Amazon'). Here Amazon is acting as an agency.
The same applies for flights bought via a travel agency rather than directly. Here you lose Section 75 protection, though in this instance, the industry's own protection rules are more powerful.
Clever ways to calculate your finances