Does Returning Items Affect Credit?

How Do Credit Card Refunds Work?

When you return an item for a refund to your credit card, the merchant sends a request to your credit card company asking to have your account credited for the refund amount. This is a reversal of the original transaction: When you made your original purchase, the merchant sent a payment request to your card issuer, who added the purchase amount to your card balance. Getting a refund reverses the original purchase and returns your money.

You'll see the refund reflected in your credit card balance when the return is complete. This can happen immediately, but sometimes takes a few days of processing time.

Learn more: How Credit Card Refunds Work

What's a Negative Balance?

If you paid your credit card balance in full before requesting the refund, your account may show a negative balance when the refund posts. In this case, a negative balance is actually a plus: It means you have a credit on your account. What can you do with a negative balance?

• Spend it. Your card issuer will use the credit to cover your charges until it's used up.
• Request a refund. You can also ask your card company to issue a paper check or transfer the extra funds to your bank account.

When Returning Items Can Affect Your Credit

Returning an item you paid for by credit card can improve your credit utilization rate and possibly help your credit score. To understand how this works, let's rewind to the beginning.

When you used your card to pay for your original purchase, particularly a large purchase, you added to your card balance and increased your credit utilization. This increase may have caused your credit score to drop. Returning your item for a refund reverses the process, lowers your credit utilization and could raise your credit score (or restore it to roughly its pre-purchase level, all else being equal).

Credit Utilization and Your Credit Score

What exactly is credit utilization? Credit utilization is your credit card balance divided by your credit limit: It reflects the amount of available credit you're using.

Example: Say you have a credit card with a $5,000 credit limit and you're carrying a balance of $2,000. Your credit utilization is 40% ($2,000 divided by $5,000).

Most experts recommend keeping your credit utilization ratio below 30% to avoid hurting your credit scores, and below 10% to maintain the best scores. In our example, returning an item for a $500 refund could reduce your card balance to $1,500, or 30% of your available credit. Since credit utilization accounts for about 30% of your FICO^® Score^Θ, a $500 refund could have a significant impact.

Learn more: Complete Guide to Credit Scores

Tip: Pay Your Bill on Time

Here's an additional pitfall to avoid: Don't forget to pay your regular monthly credit card bill regardless of what's happening with your refund. Card issuers don't count a refund as a payment on your account. As long as your account shows a balance, you should still make your monthly payment on your regular due date.

If you miss your regular payment date, you could be on the hook for late payment fees and penalty interest rates on your account. Your card issuer will also report a 30-day late payment to credit reporting agencies. A late payment has a negative effect on your credit score and stays on your credit report for up to seven years.

Do You Lose Rewards on Returned Purchases?

Rewards points and cash back rewards are forfeited when your credit card is refunded. Anytime a charge is reversed, the points or cash back you earned from the transaction is deducted from your rewards account.

What if You Already Used the Rewards?

If you've already used your points or miles, or redeemed cash back, your rewards account may show a negative balance. As you earn rewards going forward, your account balance will increase, eventually moving back into positive territory.

Can You Keep Rewards After a Return?

One way to keep rewards when returning an item is to accept store credit instead of having money refunded to your credit card. By doing this, you keep your original transaction (and the rewards that came with it) intact. This is probably only worth doing if you're certain you'll use the store credit in the foreseeable future. Otherwise, you run the risk of letting your refund money sit idle as store credit while your credit card balance remains.

The Bottom Line

Ideally, returning an unwanted item for a refund should undo any consequences that may have come from making a big purchase on your card in the first place. You'll have to forgo the thing you bought and any rewards that came with your purchase, but your account balance should drop back to where it was before—and your credit should bounce back as well.

The process from return to completed refund can take some time. Shipping the item back to the merchant, waiting for the merchant to process the return and finally watching for your refund to post may add up to a week or longer. When the dust settles, check up on your credit report and score for free with Experian to see where your credit stands.