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Credit Card Authorizations

When you present your credit card as payment (either physically or by submitting the number by snail-mail), the merchant will typically contact their transaction processor, which will then contact the issuer of your card to confirm that there is sufficient available credit to cover the purchase (or cash advance.) This can be done in a matter of seconds as you standing at a store check-out counter.

When the card issuer's computer system approves the transaction, it creates an authorization on your account. This means that, while the money has not actually been paid to the merchant yet, your available credit is reduced by the amount of the authorization, so that the credit is set aside and cannot be spent at another merchant. The charge is completed one to five days later, when the transaction slip that you signed is received by the card issuer, and they transfer funds to the merchant's bank account. If the slip is not received within a certain number of days (one issuer told me five days), the authorization will expire, and the "on-hold" amount will become available again.

A common confusion regarding authorizations occurs in situations where the total transaction amount is uncertain. For example, a credit card is generally required for renting a car. Because of the potential for extending the car rental period or driving over a certain number of miles, the rental agency will immediately request the credit card authorization in an amount that they estimate will cover the total bill. Many hotels do this as well, because a guest might stay longer than planned, and would be liable for the extra daily charges. To some degree, card rental agencies and hotels may be covering themselves for the cost of minor damage to the vehicle or room, or theft of small items.

Often the customer may not be aware of the amount of an estimated authorization, and may be surprised to find the available credit on the card is lower than expected.

When the rental car is returned, or the hotel guest checks out, the final bill will be calculated based on actual days and/or miles involved. The customer will be presented with a transaction slip to sign for that amount, and this will eventually arrive at the card issuer, which will pay the merchant the amount on the slip and release any excess amount of credit from the original authorization. But since this can take days, the available credit on the card can remain "on hold" for the full amount of the authorization, even after the customer perceives the transaction to be finished.

Any time you are about to initiate a transaction where the total charges are unknown when you present your card, be prepared for a large authorization (at least $500 for a car rental), and ask the merchant to tell you the exact amount.


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