PERSONAL FINANCE:Paying a deposit or an annual subscription can be dangerous in these times of widespread company closures, but consumers can protect themselves

CREDIT CARDS have long been the bad boys of personal finance, tempting people to overindulge in retail therapy and rack up debts at punitive rates of interest. But think twice before you get busy with the scissors and condemn your flexible friend to the bin, because it turns out that credit cards – if used properly – provide one of the most effective ways of protecting yourself against financial loss.

With gyms, hotels and shops falling foul of the recession with alarming regularity, many consumers have found themselves painfully out of pocket. However, by choosing the right payment method, it’s possible to protect yourself from such business failures.

Take gym membership. In March, the Dublin gym chain Total Fitness went into liquidation, owing 11,150 irate members some €1.6 million.

Earlier this month, the liquidator David Van Dessell of Kavanagh Fennell wrote to members to let them know that due to the level of higher ranking preferential and secured creditors, “there will not be a dividend” to unsecured creditors. In other words, the members will get zip out of the proceeds of the liquidation.

However, Total Fitness members who paid their fees by Visa, Mastercard or American Express should be able to reclaim the unused portion of their membership through what is known as the “chargeback” mechanism.

Una Dillon of the Irish Payments Services Organisation (Ipso) explains that this is a dispute resolution process whereby a credit card provider will refund your money if goods weren’t received or services weren’t rendered. So if you paid, say, €400 for a full year’s membership with Total Fitness, and only three months had expired when it closed, you should be able to charge back the balance of 75 per cent, or €300.

Paying by debit card, however, is “like a cheque,” Dillon explains. “The rules are different [to credit cards]. You wouldn’t necessarily be entitled to [get] funds back.” Mastercard and Laser debit cards don’t come with a chargeback entitlement, but Visa recently changed the rules for its debit card so if you used this method of payment for your Total Fitness membership, you should be in luck. As is the case with the credit card chargeback process, you should contact your bank and advise them that you wish to reclaim your membership fees. Correspondence from Van Dessell can be used to support the claim.

According to the National Consumer Agency (NCA), the circumstances in which you are entitled to request a chargeback are set out under the rules of the various card schemes such as Visa, MasterCard, Laser and Maestro. Your card provider must sign up to these rules and must investigate any transaction you dispute. If you’re not happy with the response, you are entitled to make a complaint.

Consumers who pay annual subscription fees by monthly direct debit also have a certain amount of protection if a gym or other service provider goes out of business, as they can instruct their bank to stop the payments.

In his letter to Total Fitness members, Van Dessell said that he has issued instructions to the company’s bank that no further receipts should be accepted into the bank account. Reasonable as this sounds, it will provide little solace to the gym chain’s members. At the company’s creditors’ meeting last month, many members expressed annoyance that they had not been offered direct debit as a payment option and so they paid the entire annual fee upfront, often with Laser cards, and as a result they now have no comeback.

The closure of Jim Langan’s furniture business in April 2009 also served as a cautionary tale for consumers. When the stores closed, more than 1,000 customers had paid deposits – or in some cases the full amount – for furniture which they had not received. In total, they were owed more than €1 million. Hundreds of customers turned up at the creditors’ meeting to berate the chain’s owner, Jim Langan.

One angry depositor had paid €1,100 for a sofa. She told the meeting that she and her children were “sitting on deckchairs”, as she couldn’t afford another sofa. Another customer complained that she had ordered a table and chairs. “Lucky enough I got my table, but I never got my chairs,” she said. “Do you want my deckchairs?” the first customer joked.

Other customers had borrowed money to put deposits on items of furniture and were paying off their loans even though they never received their orders. Many people complained that they had turned up at the closed stores and had been infuriated to see “their” furniture on the floor of the showrooms, but unable to take possession of it.

Liquidator Jim Stafford informed them that they would only receive furniture if it was in the company’s warehouse or showrooms and if it had been specifically allocated to them (which was unlikely). Otherwise they were ranked as unsecured creditors, behind secured creditors such as Revenue, meaning that they were unlikely to receive recompense. As with Total Fitness, the only Jim Langan customers with any hope of a happy ending were those who paid by credit card, and who may have been able to get a refund through their card provider. Those who paid by cash, Laser card or cheque had to join the back of the queue as unsecured creditors.

Despite the chargeback safety net offered by credit cards, people are using this payment method less and less, with debit cards being used more frequently. Dillon says it is worth using your credit card (or Visa debit card) if, for example, you’re booking a holiday months in advance or if you’re putting down a deposit for a wedding. Understandably, people worry about getting into debt, but she points out that if your card is in credit, then this isn’t a problem and you won’t be charged interest. People start getting into trouble if they only pay off the bare minimum each month, so it’s important to clear the debt as soon as possible.

As well as paying by credit card (or Visa debit card), what other steps can consumers take to avoid being burned by businesses going bust? The NCA advises against paying in full for items if there is a long delivery period.

Also don’t hold on to credit notes or gift vouchers for too long. “The only opportunity to get your money back in respect of credit notes or gift vouchers will be as an “unsecured creditor” – the last in an often long line of those owed money by the company,” the agency says.

Meanwhile in the wedding industry, the number of hotels getting into trouble has become a concern for couples planning their nuptials. Bride-to-be internet forums are full of discussions about whether it is foolhardy or fine to put down a deposit for a venue that is in receivership. In order to assuage these understandable fears, some receivers are providing couples with letters guaranteeing their deposits.

Michael McAteer of Grant Thornton is the receiver at Tulfarris House and Golf Resort, a popular venue in Wicklow that is booked for 80 weddings this year. “We fully recognise that seeing a hotel in receivership makes people nervous,” he says. To address this, he is happy to provide letters of guarantee. In such cases the receiver gives the guarantee, but ultimately it is guaranteed by the bank (or other creditor) who appointed the receiver.