Credit card refund: how it works

Sometimes a credit card purchase that seemed like a great idea when you made it turns out to be a huge mistake.

While you can return an item or cancel a service and receive a refund, make sure you understand the return process or your credit could suffer.

There are many reasons why you might want to return a purchase. You may have splurged on a new desk only to find it’s too big for your space. Maybe the necklace you bought online came with a broken clasp. Or maybe you just changed your mind and decided you didn’t want to spend $999 on an online course, so you took out a money-back guarantee from the seller.

Regardless of why you choose to return an item, “make sure you understand the return policy,” says Rod Griffin, Experian’s senior director of education and consumer information.

The steps you take after you request a refund on your credit card can harm or protect your credit.

How Credit Card Refunds Work

When you make a purchase with cash, there are two parties involved in the transaction – you and the seller. If you receive a refund after making a cash purchase, the seller can simply refund you for the purchase.

However, when you make a purchase with a credit card, the card issuer is also involved in the transaction. In effect, the issuer is prolonging the payment to the merchant with the understanding that you will refund the issuer when you pay your credit card bill. Since the card issuer is acting as an intermediary in the original transaction, they must act as an intermediary again when the money is returned to you.

This means that if you request a refund, the seller must return the money to the party that paid, i.e. the credit card company. Your credit card company will then issue you a refund in the form of a credit on your credit card statement.

How long does it take to return a credit card?

Unfortunately, there is no universal rule that determines how long it will take to receive a refund. First, retailers’ policies are different. One seller may take 15 days to get a refund, while another may take 30 or 45 days.

“In many, if not most states, retailers are required to publish their return policies,” says Linda Sherry, director of national priorities for San Francisco-based advocacy group Consumer Action.

However, “not all of these laws require the same from online merchants,” Sherry adds. Thus, some sellers are not required to tell you at all when a refund can be expected.

Reimbursement may take even longer if you need to return an item purchased online by mail. For example, according to Amazon’s refund policy, “it may take up to 25 days for an item to reach us after you return it.” Only after receiving the item will Amazon process the return.

After the seller completes the refund to the credit card company, it may take a few more days for your card issuer to apply your credit.

Can a Credit Card Refund Affect Your Credit?

How you process credit card refunds can affect your credit score.

If you’re waiting for a refund, you might be tempted to hold on to your money rather than pay your credit card bill because you know the refund will come. However, that would be a mistake, says Griffin.

“If you are waiting for a refund and you are not sure that it will be before the due date, make at least the minimum payment,” he said. In this way, you will avoid a late payment, which can not only damage your credit history, but also leave you on the hook for late payment.

Another mistake that can hurt your credit score is if you think a refund is considered a credit card payment. Let’s say you have a balance on your credit card and the minimum credit card payment due is $25. Before making payment, you will see that $30 will be refunded to your account for the returned product.

You may think that you don’t have to pay the bill this month because the loan is over the minimum payment. But this is not necessarily the case. You may still be required to pay the bill because the refund doesn’t count as a payment, Griffin says.

You may be charged interest on a refunded purchase. If it takes more than 30-45 days for a refund to apply and you don’t pay your entire credit card bill, interest may accrue on the amount you receive a refund.

It’s up to your card issuer to pay that interest, Griffin says. Your best bet is to call and ask. If you are responsible for the interest and don’t pay it, the balance will continue to accrue interest, which can affect your credit over time.

Credit card refunds can also positively affect your credit. Whenever you withdraw something from your credit card, your credit utilization ratio—the balance on your credit card relative to your line of credit—increases. A higher credit utilization rate can hurt your credit. On the other hand, once the refund is applied, the utilization rate goes down, which can increase your score.

Refunds, negative balances and rewards

Let’s say a refund arrives late and you pay your credit card bill to avoid a late payment. If you paid for part or all of the returned item when you paid your credit card bill, you may end up with a negative balance on your credit card after applying the credit.

It simply means that your card issuer owes you money. They can either use credit the next time you buy something with the card, or they can give you a check if you ask for one. From a credit standpoint, having a negative balance on your credit card won’t hurt you, Griffin says. Rather, the account will be reported to the credit bureau as having a zero balance.

While it can be a relief to receive a refund for a purchase you no longer need, it can also come with a downside. According to a Chase spokesperson, if you have a rewards card and received a reward for that purchase, those rewards will be forfeited if you receive a refund for the purchase. This means that the card issuer will take the rewards back, or if you have already cashed them out, your rewards balance will be negative.

What is the difference between refund and chargeback?

If you ask a store for a refund for an item you bought and returned, this is called a refund. If your credit card company cancels a charge on your card because you disputed it as unauthorized or because of a billing error, this is known as a chargeback. Refunds are merchant initiated and originate from the merchant, while refunds are initiated by your credit card company and originate from your card issuer.

bottom line

If you’re somehow unsure about an expected refund, it doesn’t hurt to call your card issuer to let them know you’re expecting a refund as soon as you request it from the merchant, Griffin says. This way you are less likely to run into any surprises and you can directly ask what they expect from you.