Alternate name: Card authorization, pre-authorization hold, preauth
For example, let’s say you have a credit card with a $10,000 credit limit and an available balance of $9,000. You go to the store to make a $100 purchase. As your card is swiped, the merchant transmits the amount of this transaction to your credit card issuer, which places an authorization hold on your account of $100, thereby reducing your available credit limit by $100 to $8,900. Authorization holds work in a similar way with debit cards. If you have a checking account with a $10,000 balance and $1,000 in pending transactions, your available balance will be reduced to $8,900 immediately after presenting your card to make a $100 purchase. This is due to the authorization hold. Within a few days—anywhere from one to eight after the transaction (although some holds can be up to 30 days)—if the transaction has not been canceled, it will likely settle, and the authorization hold will be lifted and replaced by the settled transaction. If the transaction does not settle before the hold expires, the hold will fall off before settlement and the hold amount will become available again.
How Authorization Holds Work
When a customer uses their credit or debit card to make a purchase, the merchant communicates the amount of the transaction to the card issuer. If the purchaser does not have available credit (in the case of a credit card) or available balance (in the case of a debit card) to make the purchase, or their card is otherwise ineligible to complete the purchase, the transaction will be declined. However, if the purchaser has the credit limit or funds available in their account, an authorization hold will be placed on their account for the amount of the purchase. The hold remains in place until the transaction settles, the transaction is canceled, or the hold expires. At some locations—such as hotels, gas stations, and restaurants—the authorization hold may be for some estimated amount since the final amount is not yet known when the card is presented. This is known as an estimated or initial authorization.
Pros and Cons of an Authorization Hold
Pros Explained
Protects merchants: When a debit cardholder makes a purchase using their debit card, the cash is not withdrawn from their bank account immediately; it takes a few days for the transaction to settle. The same applies to a credit card transaction. An authorization hold confirms to merchants that you have the funds or credit limit available to complete the purchase even before settlement, and that the amount can’t be spent on something else. Alerts customers to issues with their account: Authorization holds can alert you to issues with your account. If your card is declined in the authorization hold process, this can be an indication that you need to check your account balance or credit limit. It’s also possible that your card was canceled or that your issuer detected fraudulent activity on your account, in which case you should contact your card issuer. Although having a card declined may be embarrassing, it can alert you to potential issues with your account and could even help you avoid overdraft fees in the case of a debit card.
Cons Explained
May still exist even if a transaction is canceled: Ideally, when a transaction is canceled, the authorization hold is canceled as well. However, if a merchant does not send a proper reversal message, it is possible an authorization hold will still exist even after a transaction has been canceled. This means that the cardholder will not have access to those funds until the hold is automatically dropped, which could take anywhere from one to eight days.May end up being more than the final sale amount: When an estimated authorization hold is used, the amount of the hold may end up being greater than the final sale amount, in which case the cardholder’s available credit limit or funds may be unnecessarily limited. For example, if a hotel places a hold for the price of the room plus $100 for incidental charges but you don’t make any incidental purchases, your ability to spend using that card would have been limited by the $100 amount unnecessarily. The same may be true at a gas station—if a gas station routinely places $50 authorization holds on cards, cardholders who spend less than that at the pump may see their available credit or funds reduced by more than the amount they actually spent.
