How refunds to credit cards work

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

While you may be able to return a product or cancel a service and get a refund, be sure you understand the refund process, or your credit could take a hit.

There are many reasons why you may want to return a purchase. You may have splurged on a new table only to find it is slightly too large for your space. Perhaps the necklace you bought online arrived 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 the retailer up on its money-back guarantee.

Regardless of why you decide to return an item, “make sure you understand the return policy,” says Rod Griffin, senior director of consumer education and awareness for Experian.

The steps you take after you request a refund to your credit card could hurt your credit or protect it.

How credit card refunds work

When you make a purchase with cash, the transaction involves two parties — you and the retailer. If you get a refund after making a cash purchase, the retailer can simply give you back the cash from the purchase.

However, when you make a purchase with a credit card, the card issuer is involved in the transaction as well. In fact, the issuer extends the payment to the retailer with the understanding that you will pay the issuer back when you pay your credit card bill. Since the card issuer serves as something of a middleman in the original transaction, it must serve as a middleman again when you are issued a refund.

That means if you ask for a refund, the retailer must refund the party that paid it, which is the credit card company. The credit card company would then issue the refund to you in the form of a credit on your credit card statement.

How long does a credit card refund take?

Unfortunately, there is no universal rule that determines how long it takes to get a refund. For one thing, retailer policies differ. One retailer may take 15 days to issue a refund while another may take 30 or 45.

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

However, “not all these laws require online merchants to do the same,” Sherry adds. Therefore, some merchants may not be obligated to tell you when you can expect a refund at all.

It may take even longer to get a refund if you have to return an item purchased online via mail. For example, according to Amazon’s refund policy, “it can take up to 25 days for an item to reach us once you return it.” It’s not until after the item is received that Amazon would process the refund.

Once the retailer issues 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?

The way you handle a credit card refund can have implications for your credit score.

If you’re waiting for a refund, you may be tempted to hold onto your money rather than pay your credit card bill since you know the refund is coming. However that would be a mistake, says Griffin.

“If you’re waiting for a refund and you’re not sure if it’s going to be there before the payment is due, make at least the minimum payment,” he said. That way you avoid a late payment, which could not only hurt your credit score but leave you on the hook for a late fee.

Another mistake that could hurt your credit score is believing the refund counts as a credit card payment. Say you are carrying a balance on your credit card and the minimum credit card payment due is $25. Before you make your payment, you see that a refund of $30 is applied to your account for a product you returned.

You may believe you don’t have to pay your bill that month because the credit is for more than the minimum payment due. But that’s not necessarily the case. You could still be obligated to pay the bill because the refund does not count as a payment, Griffin says.

You may be charged interest on a refunded purchase. If it takes longer than 30 to 45 days for your refund to be applied and you don’t pay your entire credit card bill, the charge you’re getting a refund for may incur interest.

Whether you are responsible for paying that interest is up to your card issuer, Griffin says. The best thing for you to do is call and ask. If you are responsible for the interest and you don’t pay it, the balance will continue to accrue interest and could impact your credit over time.

A credit card refund can also impact your credit in a positive way. Whenever you charge something on a credit card, your credit utilization ratio — the balance on your credit card in relation to the credit line — goes up. A higher credit utilization ratio can hurt your credit. On the other hand, once a refund is applied, the utilization ratio goes down, which can boost your score.

Refunds, negative balances and rewards

Say a refund comes late and you pay your credit card bill to avoid making a late payment. If you paid for part or all of the refunded item when you paid the credit card bill, you may end up with a negative balance on your credit card once the credit is applied.

That simply means your card issuer owes you money. They may either apply the credit the next time you buy something using the card or they may issue you a check if you request it. From a credit standpoint, a negative balance on your credit card won’t hurt you, Griffin says. Rather, the account would be reported to credit bureaus as having a zero balance.

While getting a refund for a purchase you no longer want can be a relief, there could be a downside. If you have a rewards card and you earned rewards on that purchase, those rewards are forfeited if you get a refund on the purchase, according to a Chase spokesman. That means the card issuer will take the rewards back, or if you have already cashed them in, you will have a negative value in your reward balance.

What is the difference between a refund and a chargeback?

If you ask the store to refund the money from an item you bought and returned, that’s called a refund. If your credit card company reverses a charge on your card because you disputed it as unauthorized or as a billing error, that’s called a chargeback. A refund is initiated by the merchant and comes from the merchant, while a chargeback is initiated by your credit card company and comes from your card issuer.

Bottom line

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