What is the difference between a pre-authorization and a charge on a credit card?
We periodically get phone calls asking if we actually charge customers’ credit cards at the time of purchase. As indicated in the Terms and Conditions section of our website, your credit card will not be charged until the item ordered is verified to be in stock and available to ship. However, we obtain preauthorization from your credit card company at the time your order is placed. When your order is ready to ship, the preauthorization amount will be replaced by an actual charge debited from your card.
Authorization hold (also card authorization, preauthorization, or preauth) is the practice within the banking industry of authorizing electronic transactions done with a debit card or credit card and holding this balance as unavailable either until the merchant clears the transaction (also called settlement), or the hold “falls off.” In the case of debit cards, authorization holds can fall off the account (thus rendering the balance available again) anywhere from 1–5 days after the transaction date depending on the bank’s policy; in the case of credit cards, holds may last as long as 30 days, depending on the issuing bank.
When a customer places an order online, our credit card processor verifies that the customer’s account is valid and that sufficient funds are available to cover the transaction’s cost. At this step, the funds are “held” and deducted from the customer’s credit limit (or bank balance, in the case of a debit card) but are not yet transferred to the merchant. It is merely a preauthorization as described above.
When the item ordered is verified to be in stock and available to ship, we then instruct our credit card processor to submit the finalized transactions to the acquirer in a “batch transfer,” which begins the settlement process, where the funds are transferred from the customer’s accounts to the merchant’s accounts.
For example, if an individual has a credit limit of $1000 and uses a credit card to make a purchase for $200, then their available credit will immediately decrease to $800. This is because the merchant has obtained an authorization from the individual’s bank by placing an order online. If the billing statement was sent out at that point, the actual charges would still be $0, because the merchant has not actually collected the funds in question. The actual charge is not put through until the item ordered is verified to be in stock and available to ship.
A debit card works slightly differently. Similar to the previous example, if one has a balance of $1000 in the bank and used a debit card to make a purchase for $200, then their available balance will immediately decrease to $800 as a hold on the $200 is enacted. This is because the merchant has obtained an authorization from the individual’s bank by placing an order online. However, the actual balance with the bank is still $1000, because the merchant has not actually collected the funds in question.
Contrary to our practice, many of our competitors will preauthorize AND capture your funds simultaneously at the time an online order is placed, regardless if the items are in stock or not. Please keep this in mind when choosing who you do business with.