How Do Credit Card Refunds Work

If you’re a merchant taking payments via credit cards then it has to be expected that every now and then you’ll be asked to make a credit card refund. There are strict rules governing when a full refund has to be paid, and each merchant will have their own specific credit card refund rules over and above statutory consumer rules. You may choose to offer a credit card refund when you’re not legally bound to do so, for example, in order to foster consumer goodwill and customer loyalty. 

No matter what the circumstances are, knowing how to process credit card refunds securely and at speed will help any merchant to generate customer satisfaction and good word of mouth.   

An explanation of credit card purchases

Every credit card holder has a credit limit set by the issuer of their card. This limit basically sets out the maximum amount they can borrow using the card, and once the limit has been reached the holder won’t be able to spend any more until they pay the balance down. The balance is the amount the card holder owes to the issuer at the end of a month (the usual billing cycle). 

When a shopper makes a credit card purchase with a merchant the money is requested from the issuer of the card rather than the shopper. The amount in question will be paid electronically to the merchant, and then automatically added to the balance on the card. The responsibility then falls on the shopper to pay the amount in question back to the card issuer. 

As well as the flexibility that any provision of credit automatically offers, there are other advantages to shoppers in using credit cards:

• Many cards operate rewards schemes, allowing shoppers to build points toward future purchases

• Charging to a card enables shoppers to dispute charges they disagree with and not ultimately be held responsible for paying

• Paying with a credit card offers the maximum payment protection, covering issues such as fraud 

How credit card refunds are issued

In simple terms, a credit card refund takes the process of a credit card payment and puts it into reverse. The shopper returns the item in question to the merchant, and the amount the item originally cost is paid back to the card issuer by the merchant. In the majority of cases, merchants do not offer cash refunds for purchases originally made via credit card. 

The shopper should be aware that any points or awards that they earned via the specific purchase will be deducted from their balance once the card issuer has paid the amount of the refund back to the balance of the shopper. If the shopper has already made use of the rewards balance before the refund is processed by the card issuer then there is a chance that the rewards balance may slip into the negative for a period of time.  

How long does a credit card refund take to process?

There are several variables that can affect how long it takes for a credit card refund to be processed and returned to the cardholder’s balance. These include:

• The policies of the retailer

• The policies of the card issuer

• The method of return – many online retailers don’t even start to process a credit card refund until an item has been returned by the shopper. In many cases this will involve returning the item in question through the mail. Once you, as a merchant, have processed the return of an item, it can take 7–10 business days for the purchase amount to be returned to the account. 

We Can Help

If you’re interested in finding out more about credit card refunds, or any other aspect of your business finances, then get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.