How Do Credit Card Refunds Work?

Introduction

We’ve all been there … you make a purchase only to decide to return it for one reason or another. It happens.

The merchant’s return policy will determine whether you get a refund, a store credit, or if you’re even able to return an item. Your method of purchase also has an impact. For example, if you used your debit card, the refunded money goes right back into your bank account as if you never bought that sweater you thought was navy blue but turned out to be more of a royal blue. Easy peasy.

But how does it work if you bought that sweater with a credit card?

What Is a Credit Card Refund?

When you return an item that was purchased with a credit card, you won’t receive any actual money back. Instead, you’ll be reimbursed in the form of a credit card refund. Why? Because of how credit card purchases work.

Super summed up version: when you tap, swipe, or insert your credit card, the merchant requests a payment from the card issuer, and you pay the issuer back at a later date. You’re essentially borrowing money.

If you’re returning a credit card-purchased item, that process works the same way, but in reverse. You return the sweater, the merchant asks the credit issuer to credit you for the returned amount, and the issuer posts that credit to your account. Still relatively easy peasy … just no cash involved.

Refunds vs. Chargebacks

A credit card refund is when you receive a credit on your account after returning an item purchased with a credit card. A chargeback, on the other hand, reverses a charge after you’ve successfully disputed the transaction with your credit card issuer.

The key difference is the dispute.

You can dispute a charge for various reasons, such as billing errors, if you have a complaint about the quality of the item you purchased, or if the merchant refuses to refund an item.

If going straight to the merchant doesn’t solve the issue, then disputing the purchase with your credit card issuer and asking them to reverse the charge (initiating a chargeback) is another option.

Downsides of Credit Card Refunds

Generally speaking, a refund is something you sought out in the first place. You wanted a refund and you got it — that’s good, right? But there are still a couple of things to be aware of when it comes to credit card refunds.

You may lose rewards and bonuses

The credit card rewards or other perks you get from making purchases are usually reversed or don’t apply after you get a refund. This could include things like cash back rewards, points or even progress made toward earning a credit card sign-up bonus.

Let’s say you use a new credit card that offers $200 in rewards after you spend $1,000 in the first three months. If you spent exactly $1,000, but then make a return, you’ve no longer spent the $1,000 required to earn the bonus.

So, if you don’t hit $1,000 in total spending again by the end of the period, you may miss out on that reward.

And what if the return happens after the reward is issued? Depending on the terms of that offer, the reward could still be retracted.

Luckily, there may be some flexibility when it comes to these things. But if you want to know how your specific issuer handles returns and rewards, you can contact them.

You could be stuck with foreign transaction fees

Many cards charge a fee for foreign transactions — often a percentage of the transaction total. This usually accounts for currency conversion and processing, but if you return something that was subject to a foreign transaction fee, the fee might not be refunded.

This can vary, so you may want to check your card issuer’s policies. And you could contact your issuer to ask for the fee to be waived. They might be willing to make an exception.

How Long Does a Credit Card Refund Take?

When you get your refund depends on several factors.

• The merchant’s return policy: Do they even offer refunds? If so, how quickly do they process them?

• When and how you return the item to the merchant: If you return it right away — in person — it should speed up the process. But if you have to ship that item, it could delay things due to delivery time.

This can all vary from merchant to merchant, so the best way to find out exactly how long it will take is to contact the merchant and ask, or check their online FAQs.

After that, there’s also the time it takes your card company to post the refund to your account. This could take around three to seven business days.

Do Credit Card Refunds Count as Payments?

On paper — either the literal paper your statement is printed on or your e-statement document — credit card refunds may look like payments. But they aren’t the same thing. Refunds are considered account credits, not payments.

So, while refunds do reduce your total account balance, they don’t count as part of the minimum payment you need to make for your billing cycle.

Let’s say you have a $1,000 balance on your credit card and you make a $250 return. Your balance may now be $750, but that wouldn’t count as making a $250 payment. You’d still have to pay at least the minimum payment by the due date.

That said, there are a couple of things to consider when it comes to refunds and payments.

First of all, if a refund results in your card having a negative balance, you won’t have to make a payment. And you can either keep that negative balance as a credit for future purchases or request a check or deposit from your card issuer.

Second, the timing of a refund is significant. A refund will reduce the amount owed for the billing cycle it fell on. So, while a refund doesn’t count as a payment, it will ultimately impact how much you owe for that period.

But let’s say you buy something during one billing cycle — we’ll call it Billing Cycle A. Then, some time passes and you choose to return the item. If Billing Cycle A has already closed, the refund transaction will post in the next billing cycle (Billing Cycle B).

Your total balance for Billing Cycle A will still reflect the purchase, so you’ll still have to pay for it. The refund won’t impact what you owe until Billing Cycle B.

This is something you might want to keep in mind if you make a return near the end of your card’s billing cycle.

FAQ for Credit Card Refunds

Have questions about credit card refunds? We have answers.

Do you get to keep any rewards earned from the purchase?

Not likely. Odds are, when you return an item, any rewards you earned for that original purchase (such as cash back rewards or points) will be deducted from your rewards balance. Read your credit card’s terms to verify.

How does a credit card refund affect your credit?

It’s important to remember that waiting for a refund to process doesn’t eliminate the need to pay at least the minimum amount on your balance. Making timely payments is one of the most important things you can do to build a positive credit score.

A credit card refund can also impact your credit utilization ratio (CUR) — which measures how much of your credit you’re using. The lower your CUR, the better for your credit score, but experts recommend you at least keep it below 30%.

So, if a refund reduces your CUR to below 30%, it can give your credit score a boost. On the other hand, if a refund takes a long time to show up in your account, your credit score can be harmed if that purchase amount bumps you over 30%.

For example, if you’re carrying a $300 balance with a $1,000 credit limit, your CUR is 30%. If you get a $200 refund, your CUR drops to 10%, which is good for your credit score. But, if you’ve got that same $1,000 limit and a $500 balance while waiting for the $200 refund to show up, your CUR is 50%, which may not be helpful to your credit score.

What happens if you get your refund after paying your balance?

If you receive a refund for a returned purchase after you’ve paid off your balance, it will show as a negative balance on your account. This means the issuer owes you that amount and it can be applied to a future purchase or purchases.

Bottom Line

Whether you thought that blue sweater you bought was a different shade, it didn’t fit, or there was a hole in it, returns happen. Such is life.

Thankfully, you can typically return purchased items for a refund … even if you used a credit card. Just know that the process for a credit card refund may take a little bit longer compared to a cash or debit card transaction. And there may be some considerations with the rewards you earned or foreign transaction fees, if applicable.

And most importantly, be aware that you still need to pay your credit card balance while you wait for your refund to process.