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
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.
Credit And Banking Overview