What is a pre-authorization charge?

The Mystery of the Floating Funds: Understanding Pre-Authorization Charges

Have you ever checked your credit card statement and noticed a charge that seems a bit… premature? Maybe it’s for the exact amount you expected to spend at a restaurant or gas station, but the date is a little off, or the transaction description seems vague. Chances are, you’re looking at a pre-authorization charge, or a “pre-auth.”

Don’t panic! A pre-authorization isn’t a permanent charge, but rather a temporary hold on your funds. Think of it as a digital placeholder. Merchants use pre-authorization to ensure you have sufficient credit available to cover a future purchase. It’s a safety net, guaranteeing they’ll be able to collect payment when the final transaction goes through.

Why do merchants use pre-authorization?

Several factors contribute to the prevalence of pre-authorization charges:

• Verifying Funds: The most fundamental reason is to confirm the validity and availability of your credit card. Imagine a hotel booking where you’re paying upon check-out. The hotel uses pre-authorization to ensure you haven’t maxed out your card during your stay.
• Estimating Costs: For services with variable costs, like gas stations or restaurants, pre-authorization helps estimate the final bill. A gas station might pre-authorize a small amount initially (say, $1) and then adjust it to the actual purchase amount after you’ve finished pumping. Similarly, a restaurant might pre-authorize the estimated bill, then add the tip after you’ve signed the receipt.
• Reducing Risk of Fraud: By verifying the card’s validity upfront, merchants can reduce the risk of fraudulent transactions and chargebacks.
• Securing Future Payments: For businesses with delayed payment models, like rental car companies or online subscription services, pre-authorization provides assurance that payment will be received at the agreed-upon time.

How does pre-authorization work?

The process is relatively straightforward:

1. Initiation: When you present your credit card for a transaction, the merchant sends a request to your bank or credit card issuer.
2. Verification: Your bank verifies that your account is active and that sufficient credit is available to cover the requested amount.
3. Authorization: If the funds are available, the bank places a temporary hold on your credit line, reducing your available credit by the authorized amount.
4. Completion or Cancellation: Once the final transaction is processed (e.g., the restaurant charges your card after you add the tip), the pre-authorization is replaced with the actual charge. If the transaction is canceled, the pre-authorization should be released, freeing up the held funds.

What to watch out for:

While pre-authorization charges are generally harmless, it’s essential to be aware of potential issues:

• Double Charges: Sometimes, due to technical glitches, the pre-authorization isn’t properly released after the final charge is processed. Keep an eye on your statements and contact the merchant if you see both a pre-authorization and a final charge for the same transaction.
• Higher Than Expected Amounts: Be vigilant if a pre-authorization amount seems significantly higher than what you expect to spend. Contact the merchant to understand the discrepancy.
• Extended Holds: Pre-authorization holds are typically released within a few days. If the hold persists for longer than expected (usually more than 7-10 business days), contact your bank or credit card issuer.
• Impact on Credit Limit: While not a permanent charge, pre-authorization reduces your available credit. This can be problematic if you have a low credit limit or are planning other large purchases.

In conclusion, a pre-authorization charge is a temporary hold on your funds used to verify your credit card and secure future payments. Understanding its purpose and potential pitfalls can help you manage your credit effectively and avoid any unpleasant surprises on your credit card statement. So, the next time you see a slightly mysterious charge on your online banking, take a breath – it’s probably just a pre-auth, ensuring a smooth transaction down the line.