How Do Refunds on Credit Cards Work?

LanternUpdated March 7, 2024

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Making a purchase from a store and then having to return it for one reason or another is a common experience. But the original payment method, such as if the item was charged to a credit card, determines how the refund is paid out.When returning an item that was paid for in cash, the refund is typically instant. However, for those that paid with a credit card, the refund will not instantaneously appear back on the account. It typically takes seven business days for credit card refunds to be processed.Keep reading to learn more on credit card refunds, how credit card refunds affect rewards, how long it takes to appear on your credit card, and more.

What Is a Credit Card Refund?

A credit card refund is what you will receive when you return an item that was purchased with a credit card as opposed to another method, like cash. When you make the return, you will receive a credit on your account that is equal in amount to the cost of the item returned. However, unlike with cash, the process involves more than just you and the merchant — and because of this, you won’t see your credit card refund right away.

How Do Refunds Work on Credit Cards?

To understand why credit card refunds don’t work the same way as cash refunds, it’s important to first understand how credit cards work compared to payments made with cash. When an individual makes a purchase in cash from a merchant, the exchange of funds is directly with the seller. But when they charge a purchase to their credit card, they’re not exchanging money with the merchant. Rather, credit card transactions involve several additional parties beyond the buyer and seller, each of whom plays a role in facilitating the collection and payment of funds (and later refunds). Essentially, a credit card transaction requires a series of conversations between the merchant’s bank, the bank that issued the buyer’s credit, and the payment processor and credit card company, who facilitate the whole thing.Here’s an example of how it plays out:

Let’s say a customer named Sam pays with a credit card for their purchase at Chic Boutique. From there, Chic Boutique will submit Sam’s card information and transaction details to their bank for authentication and authorization using a payment processor.
The request then flows to the credit card company, which in turn submits the request to the cardholder’s bank.
If the transaction is approved, the communication flows back through the same channels, and Chic Boutique is notified that it is authorized.
The issuing bank then sends the payment to the merchant’s bank.

Because credit card transactions are a form of credit, the monies owed are added to the buyer’s credit card statement, and those funds are owed to the bank that issued their card.As such, a refund to credit card is not as simple as the merchant handing back money to the buyer. Credit card refunds flow back through these same channels, with the refund ultimately being credited back to the buyer’s account.When refunded, the amount then appears as a credit on their credit card statement. And until that occurs, the original purchase amount will still count towards their credit limit. Because of this, it’s a good idea to take this into account when considering other expenditures in the interim.Recommended: How to Find the Right Credit Card

How Long Does It Take for a Refund to Appear on the Credit Card?

While merchants may issue refunds immediately, others may take several days or even as much as a month to process the cash back. Once the refund has been processed, it can take an additional three to seven days before that credit is posted to the cardholder’s account.Because the amount of time it takes to see a credit card refund depends on the seller’s processing time, it’s a good idea to check with the merchant for an estimated timeline.

Is a Credit Card Refund a Payment?

It’s important to keep the timelines for credit card refunds in mind when it comes to making credit card payments to avoid late payment fees or taking a hit on one’s credit score. Although a credit card refund will decrease the balance owed on the account, it’s not the same thing as making a payment.To understand why, it’s important to be familiar with how payments work. Each month, the cardholder must make at least the minimum payment or they may face a late fee, interest, and other potential penalties. To be safe, make a point of paying the minimum amount due by the date on your statement regardless of any credit card refunds you may be expecting.Additionally, because there is a delay between when the return is made and when the credit hits the buyer’s credit card account, the refund may not land until after the credit card payment is due. As such, it’s also a good idea to check the account online to know when the refund is applied and ensure that you still make the required payment by the due date.

What Happens If I Have a Negative Balance After a Refund on My Credit Card?

If the purchase being refunded is worth more than the rest of the current charges on a credit card, it will result in a negative balance. This means that the issuing bank owes money back to the cardholder instead of vice versa.There’s nothing bad about having a negative balance. That credit is simply applied towards future purchases until it is depleted. However, there may be scenarios where it’s not ideal to keep that credit in the credit card account — for example, if it’s on a rarely used backup credit card or the refund was for a big ticket item that exceeds an individual’s regular spending.In such instances, the individual can get that money back. Federal law requires the issuing bank to refund a credit balance of more than $1 within seven days of a written request from the cardholder. If there is still a credit remaining on the account six months after the refund, the bank may also automatically issue it back to the cardholder.

Does a Refund on Credit Cards Affect My Credit Score?

A refund shouldn’t have too much of an impact on one’s credit score if it is applied quickly and managed carefully to avoid an accidental late payment. But there are some ways a refund (or the timing of a refund) may affect one’s score.Credit utilization, or the ratio of credit one is using relative to their total credit available, consists of 30% of one’s credit score. A lower credit utilization rate is generally treated as a good thing because it signals that the individual can successfully manage their debt.While smaller refunds shouldn’t have a big impact on one’s credit utilization — especially if balanced out by other purchases over a statement period — a major purchase may skew one’s credit utilization rate temporarily.For example, a big refund may decrease one’s overall credit utilization and may build their credit score if not offset by other spending. Conversely, if a big refund is delayed and that amount remains outstanding for a long period of time, it will temporarily increase one’s credit utilization rate, thus potentially lowering their score.A refund can also affect one’s credit score negatively if they incorrectly count it as a payment and then don’t make the minimum payment on any balance remaining. Payments are considered late and reported to credit reporting agencies after they are 30 days past due — and getting dinged will remain on one’s credit report for up to seven years after the late payment.,Recommended: 5 Factors That May Affect Your Credit Score

Does a Refund on a Credit Card Affect My Rewards?

For those whose credit cards reward them with perks for spending — whether in the form of credit card points, cash back, or other rewards — it’s also a good idea to brush up on how refunds affect those benefits. Reward credit cards are usually based on money spent — and typically discount any refunds from these accruals.Depending on the credit card terms, any bonus or promotional awards that were earned as the result of the original purchase may also be revoked.

Other Credit Card Refund Methods

If you paid for a purchase with a credit card and then returned it, there’s a good chance you’ll get your money back in the form of your original payment method. As such, it’s unlikely a cash refund will be an alternative to a credit card refund, especially given how credit card refunds work.In some cases, you may be able to get a gift card or store credit in lieu of a credit card refund. Just keep in mind that will limit you to using your funds at that location instead of however you’d like, as would be the case with a credit card refund.

The Takeaway

Although credit card refunds may involve more backend steps than refunding a cash purchase, it’s generally a straightforward process. Still, it’s a good idea to understand the basics in order to avoid any potential pitfalls.It’s also always a great idea to make sure your credit card is fit for your unique spending habits and needs. Visit Lantern Credit to compare credit cards and find one that best fits your needs.

Photo credit: iStock/courtneyk

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