How Debit Card Holds on Your Funds Can Cost You Money

Written by , April 30, 2014

How Debit Card Holds on Your Funds Can Cost You MoneyFor quick and easy access to the funds in your checking account, nothing is quite as convenient as a debit card. Branded with a Visa or MasterCard logo, you can use a debit card at any merchant that accepts a credit card, and doing so is much quicker than paying by check.

But the process by which payments are processed whenever you make a purchase with a debit card is much different than the impact of paying by a check or using cash. Debit card use often involves the use of “holds” that can tie up funds that are in your account. It’s important to have a basic understanding of how these funds work so that your debit card use doesn’t end up costing you money.

Here’s some banking advice on how debit card hold operate.

  • Basics of a Debit Card Hold. A debit card authorization hold (which is sometimes called a “preauthorization”) is a banking practice of holding a particular dollar amount until the merchant makes a final settlement of the charge. Contrary to what you might assume, a store doesn’t actually receive its payment for a debit card purchase right away. They usually wait until the end of the day to submit all the transactions to the banks in batches. It can sometimes take a day or two before the transaction is reflected in your checking account, and perhaps up to three or four days before the merchant receives their final payment. The process is similar in the context of credit card purchases, but the holds are only made against your credit limit – no funds are actually held.
  • A Potential for Rejected Charges. Unfortunately, when a hold is pending because you’ve used your debit card, the available balance in your account will not reflect the hold amount. If you normally don’t have a lot of extra money in your account, there is therefore a possibility of you trying to make additional purchases thinking that you have enough money in your account. This can lead to rejected charges if the holds have tied up too much of your funds.
  • A Potential for Bounced Checks and Fees. If someone you’ve written a check to tries to cash that check while there are a number of holds active in your account, there may be insufficient available funds in your account and the check will “bounce.” This will certainly incur fees from your bank, and potentially other charges that may be imposed by the party you wrote the check to. Even if you have overdraft protection on your account, you’ll be responsible for the fees associated with that service.
  • Additional Holds. The issues described above can be compounded by holds that are often imposed by certain types of vendors. Gas stations, for example, commonly place a $75 or $100 for any debit card use that’s made directly at the pump, regardless of the amount of gas that’s purchased.
  • By understanding how often these holds go onto your account, you can protect yourself against certain types of problems that may arise from using your debit card.

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