The financial industry uses the term “back charges” in several different ways. It should also not be confused with a chargeback, in which funds are returned to a consumer's credit card or bank account by order from the consumer's financial institution.
In the first sense, back charges are charges which were made on a customer's account, but not paid. The provider of services or goods can demand full payment of back and current charges to make a customer's account current. Back charges will show up on every invoice until they are paid, and they may accrue interest and fees if they are left unpaid for too long. Having back charges outstanding on an account usually reflects poorly on a consumer's credit record, even if he or she can demonstrate that the charges are being left unpaid for a good reason, such as an ongoing dispute over whether or not the charges are correct.
As long as an account is unpaid, it usually cannot be closed. If a consumer attempts to close an account and there are back charges, the full amount will be due in full before the company will close out the account. In some cases, consumers can negotiate a reduced rate for the unpaid debt, with the understanding that their debt will be discharged and the account closed.
In other cases, a consumer's account is current, but additional charges are made to correct deficiencies in the account. For example, a utility might realize that it was charging the customer the wrong rate for service, and generate back charges which are designed to correct the months during which the consumer erroneously received a lower rate. Back charges can also be assessed when a customer pays a flat fee for something and the fee is not calculated properly, as when a shipping company realizes that the flat fee paid for a package was not sufficient to cover the transport costs.
Consumers can also initiate back charges, billing providers if they have to take corrective action to fix something a provider damaged or failed to perform correctly. For example, if a contractor damages someone's hardwood flooring, the consumer could repair the flooring and bill the back charges to the contractor if he or she can demonstrate that the damage was caused by the contractor and that the contractor negligently failed to protect the flooring. Companies can also issue back charges to each other, as when an architecture firm bills an engineering firm because engineering drawings related to a new project are incorrect and need to be fixed.