From opening an extra credit line to buying goods from the comfort of your home, the opportunities you have using a credit card are limitless. However, if you’re new to the world of credit cards, you might be surprised that once you swipe your card, most merchants usually block a certain sum of your funds to keep on hold.
Relax, that’s normal. This technique is called an authorization hold. Let’s explore its basics and learn more about its pros and cons.
How Does Credit Card Authorization Work?
As the name suggests, an authorization hold is a temporary hold put on a portion of your available credit card funds. When the pending transaction is processed and authorized, the funds are cleared as well. Note that this process also occurs when using debit cards.
So now that we have an idea of what an authorization hold is, let’s look at some important questions about authorization holds on credit cards. How long do they last, for example?
How Long Do Credit Card Authorizations Last?
Numerous factors define the time limit over credit card authorization holds. Your card network, type of payment card, and MCC (Merchant Category Code), among others, have a role to play. Most credit card transactions might have authorization holds expanding over a few months, especially in the car and hospitality industries.
However, since most card issuers understand that this can create a problem for cardholders and merchants, the current regulations regarding payment technologies aim to provide a delicate balance and help users settle their accounts over the shortest possible span.
Could Authorization Hold Go Wrong?
Like any other financial operation, there are different pros and cons concerning authorization holds. While the perks include protection for merchants and an alert to customers, the process has added downsides, some of which are listed below:
1. Time Limit Discrepancies
One of the main cons is time discrepancy. As mentioned above, it’s evident that some industries are allowed to place authorization holds for over a month, which can result in interest fees or budgeting issues.
2. Inaccurate Recordkeeping
Given its complex nature, using authorization holds requires accurate bookkeeping for both merchants and customers. When not treated properly, these practices might disrupt your bookkeeping, leading to confusion.
3. Risks of Double Holds
Last but not least, we should mention the risk of double holds. Customers risk facing double holds on their credit cards over a single transaction. That can also affect merchants who are at risk of a chargeback on the total pre-authorized hold.
Authorization Hold | Conclusion
While authorization holds are an effective method to streamline financial transactions, we have to understand that the financial landscape is changing.
More and more fintech providers like Tarya Fintech are here to improve financial operations and provide better services for both end users and businesses. Are you a business owner ready to join this new economic order and help your customers thrive? Then join us!