Can You Spend Provisional Credit From Your Bank?
Understand provisional bank credit's temporary status and the financial implications of spending funds under bank review.
When a consumer disputes a transaction, financial institutions may issue a temporary credit to their account known as provisional credit. This temporary measure provides immediate relief to the account holder while the financial institution investigates the legitimacy of the disputed charge. It serves as a placeholder of funds during the dispute resolution process. This credit is not a final determination of the dispute’s outcome but a conditional advance.
Understanding Provisional Credit
Provisional credit is a temporary amount applied to an account by a bank, debit, or credit card issuer during the investigation of a disputed transaction. This credit is conditional, meaning it can be reversed depending on the findings of the investigation.
Financial institutions often issue provisional credit as mandated by regulations such as the Electronic Fund Transfer Act (Regulation E) for debit card transactions and the Fair Credit Billing Act (FCBA) for credit card disputes. Regulation E, for instance, covers electronic fund transfers, including debit card transactions, ATM transfers, and direct deposits or withdrawals, protecting consumers from unauthorized or incorrect transfers. Under this regulation, common scenarios leading to provisional credit include unauthorized transactions, incorrect amounts, or merchant errors. Similarly, the FCBA applies to open-end credit accounts like credit cards and allows disputes for billing errors such as unauthorized charges, incorrect dates or amounts, or charges for goods not received.
The Investigation Process
After a financial institution issues provisional credit, it initiates an investigation to determine the validity of the disputed transaction. This process typically involves reviewing transaction details, gathering evidence, and communicating with the merchant or other parties involved. The bank aims to ascertain whether an error occurred, if the transaction was unauthorized, or if the claim is legitimate.
Regulatory timelines govern how quickly these investigations must proceed. Under Regulation E, if a financial institution cannot complete its investigation within 10 business days, it generally must provide provisional credit to the consumer’s account. The investigation can then extend up to 45 calendar days from the notice of error, or potentially up to 90 days for certain transactions, such as new accounts or point-of-sale transactions abroad. For credit card disputes under the Fair Credit Billing Act, the creditor must acknowledge receipt of a written dispute notice within 30 days and complete the investigation within two complete billing cycles, but no more than 90 days.
Implications of Provisional Credit Use
While provisional credit typically becomes immediately available for use, its temporary nature means it is not guaranteed to remain in the account permanently. Consumers can spend these funds just like any other money in their account. However, it is important to recognize that the credit is subject to reversal if the bank’s investigation concludes that the dispute is not in the customer’s favor.
If the financial institution determines the original transaction was legitimate or that no error occurred, the provisional credit will be reversed. If the customer has already spent these funds, a provisional credit reversal can lead to a lower-than-expected account balance, potentially causing overdrafts or negative balances. Such a reversal might also result in overdraft fees from the bank or returned payment fees if scheduled transactions fail due to insufficient funds.