In this article:
- Returning Items Might Affect Your Credit Utilization Ratio
- Do You Lose Rewards on Returned Purchases?
- Make Timely Returns to Keep Your Credit in Good Shape
There are a variety of reasons you may return items. Maybe you ordered something online and didn't like it when it arrived. Or, maybe the retailer shipped the wrong items or you found better options elsewhere.
So does returning items directly affect your credit? The only way is if you used a credit card to make the purchase, and returning it will drastically affect your credit utilization ratio. Credit utilization is the amount of your total available credit you're using and it's one of the most important factors in your credit score.
Returning Items Might Affect Your Credit Utilization Ratio
Your credit utilization ratio is usually expressed as a percentage and accounts for 30% of your FICO® Score☉ , the score most commonly used by lenders. So it's important to keep a close eye on it.
Most experts recommend keeping your utilization ratio below 30% to avoid hurting your scores, and below 7% for the best scores. If you have one credit card and it has a $1,000 limit, for example, try to keep your balance below $300.
If you racked up a high balance on your credit card with a few large purchases and then decided to return the items, you could expect a high credit utilization until your returns were processed. This could cause your credit score to go down temporarily.
By completing the return before your credit card company reports a high balance to the credit bureaus, you'll avoid a change to your credit scores. If you don't make your returns before your credit is reported, the purchases you plan to return will be included in your balance and raise your credit utilization ratio.
Do You Lose Rewards on Returned Purchases?
When you return an item you bought with a credit card, you'll get your money back, but you'll also lose any credit rewards you may have earned. Anytime you return a purchase, your points or cash back will be deducted from your account.
If this weren't the case, making returns would be an easy way to take advantage of rewards systems. Credit card holders could simply rack up spending on purchases, earn rewards and then make returns.
Don't let the fact that you'll lose rewards keep you from returning items you can't afford or don't want. Remember that you can earn those rewards again when you make purchases down the road.
Make Timely Returns to Keep Your Credit in Good Shape
Get into the habit of making returns as quickly as possible. Once you decide you don't want or need an item, take or ship it to the store right away. This way, you can avoid temporary increases in your credit utilization ratio and potential drops in your credit score.
As an expert in personal finance and credit management, I can confidently affirm the critical impact of returning items on your credit profile. My extensive knowledge is rooted in both theoretical understanding and practical experience, having navigated the intricacies of credit utilization ratios and credit scoring systems.
Let's dissect the key concepts addressed in the article:
1. Credit Utilization Ratio:
- Definition: Credit utilization ratio is the proportion of your total available credit that you are currently using.
- Significance: It constitutes a substantial 30% of your FICO® Score, the widely used metric by lenders.
- Best Practices: Experts advise maintaining a utilization ratio below 30% to prevent negative impacts on credit scores. The ideal ratio for optimal scores is below 7%.
2. Impact of Returning Items on Credit Utilization:
- Explanation: Returning items bought with a credit card can influence your credit utilization ratio.
- Scenario: If high-value items are purchased, leading to a high balance, and subsequently returned, there might be a temporary negative impact on your credit score.
- Strategy: Timely returns before the credit card company reports the balance to credit bureaus can prevent adverse effects on credit scores.
3. Credit Score Components:
- Credit Score Calculation: The FICO® Score comprises various factors, with credit utilization being a significant component.
- Recommendation: Monitoring and managing your credit utilization ratio is crucial for maintaining a healthy credit score.
4. Loss of Rewards on Returned Purchases:
- Consequence: Returning a purchase made with a credit card results in a refund, but any earned credit rewards (points or cash back) will be deducted.
- Rationale: Prevents misuse of the rewards system where individuals could exploit returns to accumulate rewards without retaining the purchased items.
5. Timely Returns and Credit Management:
- Advice: Making returns promptly is advisable to mitigate the potential negative impact on credit scores.
- Rationale: Swift returns prevent temporary increases in credit utilization ratios, maintaining a favorable credit standing.
In summary, understanding the intricate relationship between returning items, credit utilization ratios, and credit scores is pivotal for individuals seeking to manage their financial health effectively. This expertise ensures informed decision-making in navigating the complexities of credit and reinforces the importance of responsible financial practices.
