What Is a Preauthorization Charge and How Does It Work?

A preauthorization charge is a common financial practice where a temporary hold is placed on funds associated with a payment card. This process confirms the availability of funds for a future or anticipated purchase. It establishes a temporary reservation, ensuring a merchant has assurance of payment without immediately completing the final transaction.

Understanding Preauthorization Charges

A preauthorization charge is a temporary hold placed on a specific amount of available funds on a credit or debit card. This reservation checks the card’s validity and confirms sufficient funds are accessible for an anticipated transaction. The amount is set aside by the card issuer, reducing the cardholder’s available balance or credit limit temporarily.

The purpose of a preauthorization is to secure funds when the final amount may not be known or when there is a time gap before completion. Businesses use preauthorizations to mitigate risk, ensuring they can later charge the actual transaction amount. This verifies payment capability without processing a full charge, safeguarding against insufficient funds or invalid cards.

How Preauthorizations Work

A preauthorization begins when a merchant initiates a request, such as when a card is swiped or details are entered online. This request communicates with the card network and the customer’s bank to verify the card’s validity and fund availability. Upon verification, the bank places a temporary hold on the specified amount, reducing the customer’s accessible balance or credit limit.

The held amount is unavailable for other purchases, even though the money has not left the account. For credit cards, this affects the credit limit, while for debit cards, it impacts the available cash balance. The hold remains until the final charge is processed by the merchant or automatically expires after a set period if no final charge occurs.

Hold durations vary, generally ranging from a few days to a couple of weeks, though some may extend up to 30 days. Once the final transaction amount is known, the merchant processes the actual charge, and the preauthorization hold is released. If the transaction is canceled or the final amount is less than the hold, unused funds are released back to the cardholder’s available balance.

Common Scenarios and Managing Issues

Consumers frequently encounter preauthorization charges in various everyday transactions where the exact final cost is variable or uncertain. Examples include pay-at-the-pump fuel purchases, where a hold is placed for an estimated maximum amount. Hotels often use preauthorizations to cover room rates and potential incidental expenses. Rental car agencies also commonly place holds for the rental fee, insurance, and a security deposit.

If a preauthorization hold seems incorrect or takes too long to release, consumers can take steps to address the issue. First, contact the merchant directly to inquire about the hold and its expected release. Merchants can remove an authorization hold at any time. If the merchant cannot resolve the issue, contact the card-issuing bank to dispute the hold or request its removal.

Monitoring bank and credit card statements is advisable to confirm prompt release of preauthorization holds. To avoid unexpected issues, understand a merchant’s preauthorization policies, especially for services with variable final costs. Being aware of current available balances, particularly on debit cards, can prevent temporary cash flow limitations or unexpected overdrafts.