What Is a Pre-Authorization Payment?
Gain clarity on pre-authorization payments. Understand how temporary card holds function and their effect on your financial balance.
Pre-authorization payments involve a temporary hold on funds on a credit or debit card. This process ensures a card is valid and has sufficient funds for an anticipated transaction, without immediately deducting money. It serves as a financial safeguard for businesses, allowing them to confirm payment capability before services are rendered or goods are shipped. This temporary reservation of funds affects the cardholder’s available balance or credit limit, setting aside the amount for a potential future charge.
Understanding Pre-Authorization
A pre-authorization is a temporary hold placed on a specific amount of funds on a credit or debit card, rather than an immediate charge. This means the money is reserved by the card-issuing bank but not transferred to the merchant at that moment. Businesses use pre-authorizations to verify card validity and confirm sufficient funds for a transaction finalized later. This process helps mitigate the risk of declined payments or fraud, especially when the final transaction amount is unknown.
When a merchant requests a pre-authorization, the card network communicates with the cardholder’s issuing bank. The bank places a hold on the requested amount, which temporarily reduces the cardholder’s available credit or bank balance. This ensures funds are secured for the merchant, providing assurance that payment can be collected once the service is complete or the product is delivered. While held, these funds are inaccessible to the cardholder for other spending.
Common Uses of Pre-Authorization
Pre-authorization payments are common in various industries where the final transaction amount is not known upfront or where a security deposit is required. Hotels frequently use this practice at check-in, placing a hold to cover the room rate, potential incidental charges, and any possible damages. The amount of this hold can vary based on the hotel’s policies and the length of the stay.
Car rental agencies also rely on pre-authorizations to secure funds for the rental fee, insurance, and a security deposit for potential damages or fuel charges. This ensures the rental company has recourse for additional costs that may arise after the vehicle is returned. At gas stations, when paying at the pump, a pre-authorization hold is placed to ensure sufficient funds are available for the fuel purchase, as the exact amount is unknown until pumping is complete. These holds can range from a small amount to over $100. Online retailers may also use pre-authorizations for orders before shipping to verify card validity and funds, especially for high-value items.
The Lifecycle of Pre-Authorized Funds
After a pre-authorization hold is placed, the funds remain reserved until the merchant takes further action. One common outcome is the conversion of the pre-authorization into a final charge. This occurs when the service is completed, such as checking out of a hotel or after a car rental is returned and the final costs are tallied. The final charge replaces the temporary hold, and the actual amount is then debited from the account.
Alternatively, if the transaction is canceled or the final charge is less than the pre-authorized amount, the remaining or full amount of the hold is released. The timeframe for release varies; credit card holds can last up to 30 days, while debit card holds usually clear within one to eight business days. If a pre-authorization hold remains on an account longer than expected, contact the merchant first, then the card-issuing bank.
Distinguishing Pre-Authorization from Other Transactions
A pre-authorization is distinct from a final charge because it is a temporary hold on funds, not an actual debit or credit to the account. While a pre-authorization reserves funds, a final charge is the completed transaction where money is officially transferred. No debt is incurred at the pre-authorization stage on a credit card.
A pre-authorization is a type of pending charge, but not all pending charges are pre-authorizations. A pending charge means a transaction has been initiated but not yet fully processed and settled. For credit cards, a pre-authorization reduces the available credit limit, whereas for debit cards, it reduces the available balance in the linked bank account. This distinction is important because a debit card pre-authorization can potentially lead to insufficient funds warnings for other transactions if not carefully managed.