Hitting the road this summer? You may be stopping at gas stations, staying in hotels, renting a car and dining out more often. If you also happen to be scraping the bottom of your bank account or nearing your credit limit, watch out: Using your card for those types of transactions could put you in a bind due to what are called “holds.”
What are holds?
Holds happen when you swipe your card before the final transaction amount is known by the merchant. Think restaurants (where you leave a tip after your card is swiped), gas stations (where you swipe before filling up at the self-service pump), car rental agencies (which don’t know whether you’ll return with an empty tank or damaged car) and hotels (which don’t know how much you’ll spend on room service).
In such cases, a certain amount of your money may get set aside to account for this unpredictability until the merchant is able to send the final amount to the bank. Using a debit card? Part of your bank account balance will be locked up. Using credit? Part of your available credit limit will be temporarily off limits.
Another way of putting it: You might pump just $30 worth of gas, but have a hold on your funds or credit limit for $50 to $100, until everything is settled (which can take anywhere from mere moments to a couple days).
“The idea is that everyone wants to get paid,” says Nessa Feddis, senior vice president and chief deputy counsel of consumer protection and payments for the American Bankers Association. “The concept [of holds] is a good idea. The challenge is to ensure consumers understand it and that they can anticipate it.”
Holds can happen with both debit and credit cards, although they tend to be less of an issue with credit.
“They do the same thing with credit cards, but it’s not as noticed because typically people don’t utilize their entire credit limit,” Feddis says.
How holds work
When you swipe your card, the merchant’s payment device instantaneously sends an authorization request to the issuer.
“It basically contacts the card issuer for a request of whatever amount, and the bank responds whether or not funds are available,” Feddis says. “And then if they (the merchant) get the authorization, they’re guaranteed they will get paid.”
If you’re buying groceries, the authorization is for whatever amount the stuff in you cart tallies up to. If it’s for a transaction with an unknown final amount, things are less clear cut. So, when requesting authorization, the merchant has to make somewhat of a guess:
Gasoline: With gas, the amount of the hold “is supposed to approximate the maximum amount that could be charged in that situation,” says Jeff Lenard spokesman for the National Association of Convenience Stores (NACS).
(Note: This hold is different from the tiny temporary $1 charge you might see if you log into online banking right after filling up. This little charge is simply made to make sure your card is live, Lenard says.)
What exactly this “maximum amount” will be varies by gas station and even within the same chain of gas stations, Lenard says. And it has fluctuated over time.
“Holds were something I spent more time on a couple years ago, because it was a bigger deal when gas prices were high,” he says. “And those limits started to increase because the prices started to increase. Today, I don’t think you could say gas prices are low, but they haven’t hit the peaks of the last couple years.”
Dining: Restaurants might place a hold for the cost of your meal and an anticipated 20 percent tip. Those who have attempted to pay for a $100 meal with a $100 prepaid gift card are likely to have noticed this when the card is rejected (due to the need to hold a $20 tip).
Lodging: Hotels might place a hold for the cost of each night’s stay plus a certain percentage of that amount for incidentals.
If you’re staying in a hotel for several days, the hotel might place a hold each night, leaving you with a cumulative hold at the end of your stay, Feddis says. That’s good in the sense that you don’t end up with a giant hold on your funds at the outset (especially if you need that money for daily expenses like meals). But that cumulative hold toward the end of your stay might balloon to uncomfortable levels.
Still, as Feddis points out, that money being held “is not yours to spend anyhow.”
“You owe the hotel money,” she says. “You’ve promised to pay. They just don’t require you to go down every night and pay.”
Within the hotel category, there’s a lot of variation in hold policies, according to the American Hotel & Lodging Association, a trade group for the hospitality industry. Some hotels post their policies online. Starwood, for example, places an authorization hold at check-in for the cost of your stay, plus an undisclosed amount to cover incidentals. Hyatt, meanwhile, places holds only on debit cards (equal to the room rate, plus tax, and $50 per night for incidentals).
Not always a problem … but frustrating when it is
Lengthy holds apply only to non-PIN transactions (when you use a credit card, or select the “credit” option when using a debit card). PIN transactions (when you key in your PIN associated with your debit card) use a different infrastructure and are handled in basically real time. A hold is still placed on your funds initially, but it should fall off within minutes of the total being determined (for example, when you hang up the gas pump).
At a gas station, “there may be some instances where [the hold] still might be on there if you go inside the store right away and use the card again,” Lenard says. “But that’s probably the extent of it.”
Even non-PIN transactions at the pump may clear quickly as well nowadays. Many pumps have been updated with real-time processing capabilities. Instead of using batch clearing (which involves the merchant processing transactions at the end of the day), stations with updated pumps can send the final payment amount to the bank after you hang up the pump. If you log into online banking, you’ll see the exact amount on your receipt under your “temporary authorizations” – not a higher amount due to a hold. Visa explains here how it works. Not all gas stations (such as small mom-and-pop operations) may have integrated this process, however, Feddis says.
Given all this variation, holds can be a confusing – and frustrating – issue for customers. While someone with a high-limit credit card or big checking account balance might never notice the holds placed on their card, someone with a low-limit card or not much money in the bank is more likely to feel the pain.
Say you have $60 in your account (or left on your credit limit) and need $30 worth of gas. The station you’ve pulled into places a $75 hold. If you haven’t opted into overdraft protection (for a debit card) or given your issuer permission to let you exceed your limit (for a credit card), the merchant’s authorization request will determine that there aren’t enough funds for the purchase, and your card will be rejected.
… and if you do have overdraft protection or have opted in to over-limit transactions?
“That can unfortunately start a cascade of fees,” Lenard says. “… You think you still have $30, and then you go down the street and you buy $10 worth of stuff from one store and $10 from another store. You think you still have $10 left, but unfortunately, you’ve just been hit with three overdraft fees. And that’s beyond irritating.”
Lenard also notes that road-trippers might find themselves in a predicament if a hold from earlier in the day prevents them from getting a hotel room that night.
“Unfortunately it might be the case where you don’t have access to your money,” he says. “… it could put you in a situation that’s not just inconvenient but potentially dangerous.”
As for merchants, holds put them in a tough spot as well. Although merchants initiate the hold when requesting authorization, it’s the bank that removes it – although customers may not know that. Plus, Lenard points out, a hold placed at the pump could tie up customers’ money and prevent them from loading up on snacks and drinks within the store, which is bad for the station owner.
“Angry customers aren’t good customers that day or thereafter,” Lenard says. “You don’t have many chances to delight customers, and if you aren’t able to because of something like that, it’s a bad day.”
How to stop the hold-up
If a hold remains on your card for more than three days after the transaction, contact your issuer, Lenard says.
As for dodging holds in the first place, if you can use your debit card and do a PIN transaction, both Lenard and Feddis recommend doing so.
“When in doubt, use PIN debit,” Lenard says. “That’s going to clear off the fastest.”
Yet PIN isn’t always possible (at sit-down restaurants, for example, where the waiter takes your card, or at hotels or rental agencies, which sometimes require you to use credit). Or perhaps, Feddis says, you’re waiting to get paid, have little money in your checking account and would probably be better off using credit.
Whatever your situation, ask the business how big the hold will be and keep close tabs on your accounts. If you’re on vacation, you might swipe your card more than usual, and knowing about any holds on your funds is instrumental to avoiding overdraft/over-limit fees and card rejection.
“And that’s getting easier to do, with mobile banking,” Feddis says. “It’s probably a good idea to be monitoring for budgeting purposes as well. It’s easy to lose track and get caught up in the moment.”