Have you ever had a credit or debit card transaction declined for insufficient funds when you thought you had money in your account? You may have a credit or debit card "hold," reserving funds that you haven't spent.
Merchants and service providers set a credit or debit hold on a purchase when the total isn't known at the time the card is run, and the item or service can't be reasonably returned (for example, a tank of gas or a hotel stay). Holds are a cushion to cover possible final purchase amounts.
Consider pay-at-the-pump gas stations. When you swipe your card, the merchant can't know if you're filling a tank or just topping off – or how much gas your car holds. You may only have enough available credit for a few gallons but could fill the tank once the card is approved.
With a credit hold, station owners temporarily reserve enough of your credit limit to cover whatever the merchant designates as a limit – which may be far more than a full tank costs. Debit holds act similarly, reserving a portion of the funds in your bank account.
Once the actual value is determined and processed through the card issuer, the hold is removed, and the actual charge is placed on your account. Unfortunately, the hold reduces your available credit (or bank account balance for debit cards) in the interim, and the hold may be for more than you spend.
For gas purchases, holds usually aren't a problem because the amounts are relatively low, and processing is quick – within hours or even minutes. For larger expenses like hotel stays and rental cars, the amounts can be substantial, and processing could take days.
Holds differ because there are two parties involved – the merchant who sets the size of the hold based on their risk, and the card-issuing bank that determines how long a hold can last. (Card networks have secondary limits to keep individual banks from abusing hold times.)
Since holds are a hedge against losses, card issuers may set different hold times based on the risk assessment and processing time required for any transaction. Holds can vary by type of purchase, the merchant, and cardholder risk factors. Similarly, merchants and service provider limits vary. You may not realize a hold is in place and spend beyond your credit limit or bank account balance – resulting in a declined transaction and/or overdraft fees. Spending beyond your credit limit may also hurt your credit score. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.
How can you prevent this? Know when holds are likely to be applied – any time the purchase amount is unknown when the card is swiped – and ask about hold amounts before you start a transaction. How much is the hold, and how long does it typically last? Check your card issuer for their policy on hold times.
At gas stations, you have more options. You can pay cash or pre-authorize your purchase with the clerk for a given amount (eliminating the need for a hold). For larger purchases with hotels or rental cars, you can ask that the hold be removed as quickly as possible – but there's no guarantee the provider will comply.
To avoid credit/debit hold problems, leave a sufficient buffer in your account for everyday purchases. If you know you'll be spending heavily with merchants that apply limits – such as vacation or travel expenses – consider having a second card for spillover purchases or asking for a temporary increase in your credit limit. Credit and debit holds are manageable once you know how they work and can plan for them in advance.
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