How Does a Refund on a Credit Card Work?

So, you purchased something on a credit card, and you need to make a return. What happens next? Returning the item itself may be easy enough (depending on the store’s refund policy), but how you receive your refund will look different than it does when you make a return on a debit card or with cash. Usually if you make a return with a debit card, the money goes back to your bank account, but how does that work with a credit card account?

How do refunds work on a credit card?

Credit card refunds look different from a refund you would get on a debit card or even a cash refund because of the way credit card purchases work. Unlike a debit card or cash, the purchases you make with a credit card aren’t made with your own money but are paid for with funds from your credit card issuer, so the money isn’t returned to you directly. 

Take, for example, a sweater you bought online. When you make the purchase with your credit card, the merchant asks for payment from your credit card company. Your card issuer will pay the retailer and add the purchase amount to your account balance. You then pay the credit card issuer back when you pay your credit card bill at the end of the month. 

If you decide to return the sweater, it works the same way, but in reverse. The merchant will refund the purchase back to the credit card company, not you (this is called a chargeback). Your credit card issuer will then credit your account for the returned amount. 

How does a credit card return affect your credit?

A credit card return may or may not affect your credit score. To understand why, it is important to know about your credit utilization ratio or credit usage.

Your credit utilization ratio is the amount of your credit you’re using compared to how much is available to you on your credit line. Your credit utilization ratio is a key factor in determining your credit score, and the lower you can keep your credit card usage, the better. 

For instance, say you return an item, and the amount of the item is added back to your available credit. Because this may lower the debt you owe on your credit balance, it may also lower your credit utilization. 

But whether a credit card refund helps your credit score can also depend on when the refund is processed and credited to your account. If your credit card refund is delayed it may hurt your credit score if the purchases push your credit utilization higher during certain points in your billing cycle. 

Does a credit card refund go toward your required payment?

Credit card refunds don’t count as payments toward your monthly bill. Instead, they are added to your account as statement credits. 

If your refund has not been credited back to your account by the time your credit card bill is due, you will still have to at least make the minimum credit card payment. 

Does a refund on a credit card affect my rewards?

If you have a rewards credit card (that is a credit card where you earn cash back or miles points when you spend) any credit card rewards you earned on a purchase that was returned, such as cash back rewards or miles, will not be awarded after your refund is processed.

Maybe you’ll like to keep your rewards. You can ask the merchant to refund you in the form of store credit. However, that means you will still have to pay for the purchase on your credit card.

How long does a credit card refund take?

There is no set time for how long it might take for your refund credit or chargeback to show up on your account. Some refunds might show up right away and other refunds can take a few days. Ultimately, the time it takes to refund a transaction depends on the credit card company and its policies.

What happens if you have a negative balance after a refund on your credit card? 

If you pay your credit card balance in full every month, you may run into a situation where a returned item can lead to a negative balance on your credit card. (Remember, a negative balance on a credit card means that you’ve paid more than the amount of credit issued to you, so you actually have MORE money available to spend on your account.)

For example, if you have a zero balance on your credit card after you pay your credit card statement, and later a refund posts on an item that cost $23, your refund amount may show up as -$23. All this means that you have more credit available on your account than your current credit limit.

A negative balance is typically not a problem. Usually, the balance will be applied to your next credit card purchase, eventually bringing your balance back to $0 or more. A negative credit card balance typically does not affect your credit score because it’s not something that credit card companies report to credit bureaus. 

Still, a negative balance can create an issue if you get a large amount refunded on a card that you don’t use anymore or use rarely. In that case, you are unlikely to make purchases that could be applied to that balance. You can ask your credit card company to give you the refund via a check, money order, or direct deposit. Your credit card issuer may require that you submit your refund request in writing before sending the funds.

Some credit card companies automatically issue a refund check back to the cardholder for the negative balance (overpaid) amount, which will then bring your credit card balance to zero. In this case, any future purchases that you make will be applied as normal to your credit card, and you’ll be responsible for paying them off. This is just one more reason that it’s important to check your credit card statements every month so you know what your outstanding and available balance is on your card.