Authorization holds are a common practice used by banks and credit card companies. However, they can pose some inconveniences for consumers. As it stands, authorization holds are one of the most common reasons for credit cards to decline.
So, what is an authorization hold, and why does it matter for your bank or credit card? We’re glad you asked!
An authorization hold is when your credit or debit card provider withholds the amount approved by the cardholder or another amount based on a pending transaction. Essentially, it’s a reduction in the cardholder’s ability to spend by a designated amount, pending authorization.
For example, if you deposit a large check into your bank, a portion of this is available to you right away. The rest may require an authorization hold of a few days until the bank can verify the clearing of your funds. However, it’s a little different in the context of a credit card.
For banks and credit unions, an authorization hold on a deposit or other transaction can last for anywhere from one minute to 30 days. Even an “instant” transfer from PayPal typically requires an authorization hold of one to five minutes.
Conversely, credit cards will set an expiration date on the hold, thereby setting a timeframe to address the issue at hand. They may remove the hold before it expires if you settle the dispute or if they verify a transaction, but this hold lasts for one to 30 days.
However, if the creditor has an authorization hold for a specific transaction, then this will last anywhere from one minute to five business days for most providers. This hold will end once the creditor either charges your card for the intended transaction or when the transaction naturally “falls off” of your account.
A common example of this is when you use your credit card to make a deposit on an upcoming purchase (i.e. a $50 deposit on a $500 hotel reservation). In that case, the hold will last until the deposit is returned or paid out. It will not “charge” your account for the designated amount, but rather withhold those funds until the time of the purchase.
When you deposit a check into your account with a bank or credit union, they are essentially left to assume that the funds will arrive. There is no guarantee, as checks bounce all the time. Banks will typically try to deposit a check with insufficient funds two to three times, at which point they will cancel the transaction.
From the bank’s perspective, it is risky to offer the full amount right away. If the transaction never goes through and you spent all of the money you deposited, it will overdraft your account and potentially cause legal disputes. Therefore, authorization holds serve as a tool to prevent these issues.
On a credit card or another revolving line of credit, authorization holds usually occur when there is an issue with your payment. The lender may then put a hold on a certain amount of your available funds until the payment dispute is settled.
Beyond payment issues, lenders may hold funds for other reasons, including disputed transactions, credit card chargebacks, or when the final total of the payment is unknown at the time. You’ve likely encountered the latter when pumping gas.
Unfortunately, you can’t prevent most of these holds. However, a great way for merchants to prevent chargeback holds for their customers is with chargeback management. This will alert the bank or creditor ahead of time about an incoming chargeback, which should prevent or limit an impending authorization hold.
Moreover, creditors may choose to place an authorization hold for suspicious activity in some cases. For example, if you traveled to another country or made an unusual transaction, they may place a hold on those funds until this is resolved.
Regardless of the reason, credit card companies typically use authorization holds for the benefit of the cardholder. While it may pose an inconvenience at the time, you can easily resolve it by contacting your creditor, determining what the problem is, and addressing it.
Now that you know what an authorization hold is, don’t worry. It’s a normal part of having a financial account, and it’s benign in most cases. Even so, if you have questions about an authorization held through your provider, there’s no harm in contacting them to resolve the issue. You can even prevent excessive holds by choosing the right merchant account for your business!
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