While you may think you have a certain amount of credit always accessible to you, a credit card hold can tie up the funds and make at least some part of your credit limit impossible to use. This can be quite frustrating, especially if you don’t know the reason behind the hold and how to manage your credit.
A credit card hold could actually have two different meanings. One, where a hold could be a verified electronic transaction in which case, the said amount is declared as unavailable by your bank, till the the hold is settled. This is known as an authorization hold and is usually a risk mitigation tactic. The businesses who use authorization – like car rental services, hotels and online booking websites – often do so to reduce credit card risks. Second is an administrative hold which will restrict you from using your card because of a late payment or because you have exhausted your credit limit.
It’s good to know about both types of credit card holds so you can manage them properly.U
Triggering an administrative hold
Making late payments or spending over and above your pre-set spending limit, can activate an administrative hold. Usually the card issuers and banks do not give a grace period for any late payments and also reject new payments charged on the account soon after you miss the payment due date. Though, an administrative hold usually will fall off automatically when your account becomes regularized, if there are multiple late payments, the issuer could deny all further credit usage.
Going over your credit card limit once in a while can also trigger an administrative hold. You would be required to reduce the balance below your credit limit before you can make any new payments using your credit card.
[Related: How Is Interest Calculated on Credit Cards?]
How is an authorization hold different?
While administrative holds are usually carried out by the card issuing company, authorization holds are carried out by merchants. In this type of hold, the merchant asks the card issuer to set aside a certain amount of your available credit limit, based on the transaction you’ve initiated.
Usually, the funds blocked are more than what you’re required to pay to the merchant, which means that you won’t be able to access an amount slightly higher than what you owe. This amount serves as a security deposit and is the merchant’s way of protecting themselves against the risks associated with electronic payment transfers. The hold is effective only until the transaction is concluded. The time it takes would depend upon the merchant. In some cases, the hold could drop within 72 hours; however, in other cases it might take almost 7 to 10 business days.
Here’s an outline of how authorization holds work:
- The merchant/service provider asks you for your card number and other details before placing an authorization order.
- The hold is then initiated, and you can see the corresponding amount blocked off your credit limit.
- The hold is in place as long as the transaction is in progress. For instance, if you’re staying at a hotel for a week, the hold remains until the week is up.
- The hold is released once the transaction is over and the exact amount you owed is paid for.
Note: The time taken for the hold to drop is not definite and depends on your bank’s preauthorization processing turnaround time and policies
While seemingly complex to understand, credit card holds are actually quite simple, and a complete understanding of how to handle authorization holds can significantly influence how you manage your credit. This would allow you to plan your spending in advance and make credit card holds seem less intimidating.