As I understand things, a credit-card-accepting-merchant can obtain authorization for a credit card charge, without actually making the charge. Is this possible, and if so, will a certain amount of credit be “reserved”? How would this work?
In the hotel industry this is used quite a bit. They usually call it a “hold.” This is usually done when you check into the hotel and will be paying at check-out. The hotel wants to ensure that you will have enough money to pay for your lodging and will usually put in an authorization for the amount plus 10-20% for incidentals.
Then, at check-out, the hotel will post the amount of your stay onto the card. If you pay by other means, another card or with cash/traveler’s checks/etc. the hold will drop off (sometimes immediately, sometimes within a few days).
The big problem happens when people use a debit check card to hold a room. There is no way to put a “hold” on a debit card and the hold appears as a posting, taking money out of the account. Then it will reappear as a credit if you pay with other means. I can’t tell you how many problems this causes as some people don’t realize this and this causes their account to overdraw.
On a side note, (slight rant), if you ever place a credit card/debit card on a reservation to hold it, remember what your cancellation policy is and cancel your reservation if you are not going to make it. Otherwise you will be charged as a no show and billed for the first night.
A lot of credit card companies won’t tell you this “reserved” number directly. You can only figure out that something’s up because the available credit plus your total balance doesn’t equal your total credit line. The difference being the amount on hold.
Not where I work. We tell the customer and explain a) it’s a customary business practice with hotels and b) it will fall off the account.
If need be, we will remove the authorization manually in cases of emergency to free up the available credit.
Does this “hold” happen automatically when you check a person’s credit card to make sure it is ok, or does the merchant have to do something special to make it happen? How long does the “hold” last?
Yes, it happens automatically. It is also used extensively in the direct marketing industry (catalogs, mail-order, internet ordering).
When you place your order and the sales person obtains authorization, the amount of the order is placed “on hold” on your credit line. You’re not actually charged until the item ships, which in many cases is within a few days. If the charge doesn’t go through relatively quickly, the hold will drop off after a period of time that varies between card issuers. Some drop off after a week, others take a month.
If the hold drops off before the retailer charges your card, they can still put the charge through once they’re ready to ship. However, they will usually be charged a penalty by their payment processer.
You can call your credit card company and ask how long they allow a hold to sit on your card.
Thanks for your response.
In this case, I would be the “merchant.” I want to accept credit cards, but the tricky part is that I can’t charge for my services until 40 days or so after I perform the services. I want to know what effect an authorization, at the start of the 40 days, would have.
I work for a fairly large direct mail company. (OK, I work for the division of Bose that sells the Wave radio via mail, infomercials, etc.)
When you authorize the card it will put a hold on the customer’s account for that amount. You CAN call your payment processor and have the hold removed if you choose. However, this will mean that your authorization is no longer valid, and when you do put through the charge you’ll need to obtain another auth. Either that, or pay a penalty. The penalty is usually charged in the form of higher percentage per transaction rates.
If you want the hold to stay on until you charge the card to ensure funds remain available, I’m afraid that you will need to continuously re-auth as the original drops off. As I said before, this varies not just by credit card type (VI, MC, AMEX, etc.) but by issuing bank. Some are 7 days, some are 14, some are 30, and pretty much everything in between. I don’t think I’ve seen any over 30, though.
I hope this was helpful! You’ll need to form a partnership with a payment processor in order to accept credit cards. I’m sure they’ll walk you through all of these questions. I’m not sure how a small business would go about doing this. We use a high-volume company whose only business is to act as the middle man between merchants and the credit card companies. Maybe you could set up the same service with your bank?
Good Luck! - M