Credit Card and Debit Card Blocking

Sometimes, businesses will charge more on your credit card or debit card than what you actually authorize. If you have ever been told shortly after you stayed in a hotel or rented a car that you were over your credit card limit or had your debit card declined (although you knew you had available credit or money in your bank account), you could have encountered what is known as card "blocking." With blocking, a merchant does not actually take out all that money, but does prevent you from spending it in order to make sure they get paid. A block essentially reserves funds available through a credit or debit card to make sure cardholders do not exceed their credit limit, or, for debit cards, their bank account balance, before checking out of a hotel room or returning a rental car.

Usually, card blocking remains unnoticed -- but that could change if you have a card balance near your credit limit or have a low checking account balance when paying by debit card. If you are away from home on a vacation and without access to the Internet, you may have trouble figuring out how all your charges add up to an exceeded credit limit.

Credit card blocking generally takes place when a consumer checks into a hotel or rents a car, instances where a credit card or debit card is needed prior to actual payment. In such cases, the clerk usually contacts the company that issued your card to provide an estimated total. Once the transaction is approved, your available credit (when a credit card is used) or the balance in your bank account (when a debit card is used) is reduced by this amount. Hotels will estimate on the high side and can lock in the hold for three days or more, until your actual charges clear and are posted. This is a block, which some companies refer to as placing a "hold" on those amounts, and can quickly eat up your credit limit.

While some hotels will add a percentage of the room rate onto the hold, other will tack on a set dollar amount. For example, use of a credit card or debit card upon check in to a $100-a-night hotel room for a planned stay of five nights could mean that at least $500 would be blocked. Additionally, hotels and rental card companies often add anticipated charges for "incidentals" like food, beverages, or gasoline to the blocked amount. These incidentals can vary greatly among merchants. Meanwhile, restaurants run your credit or debit card before you tip and usually add on what they expect you to give. If they guessed too high, the amount is adjusted, although it can take a few days. Merchants set the hold amount, but banks choose whether to hold the funds and for how long.

Visa requests that financial institutions issuing its cards release all holds in under three business of the request or when the transaction clears, whichever comes first.

If you pay your bill with the same credit card or debit card you initially used when you checked in to a hotel, the final charge or amount on that card will likely replace the block in a day or two. However, if you pay your bill with a different card, or with cash or a check, the company that issued the card you used at check-in might hold the block for as long as 15 days after you've checked in. That happens because they were not informed of the final payment and did not know you paid another way.

Blocking is perfectly legal and does not require any disclosure. Sometimes blocking is also used by gas stations, by companies cleaning your home, and other businesses to make sure credit or account money will be available to complete payment.

Holds at self-service gas stations can be especially troublesome for debit card users, since they are not removed for up to three business days, until the gas station carries out a "batch" transaction that gives the bank the actual amount. According to the spokesman for the Consumer Action activist organization, oil companies vary in the hold amount, from $1 to $100.

If you are either nowhere near your credit limit or have plenty of money in your bank account, blocking is unlikely to be an issue. But if you are nearing your credit limit of have a low balance in your account, be careful. Not only can it be embarrassing to have your card declined, it can also be inconvenient, especially when you need to make an emergency purchase with insufficient credit or money in your bank account. With debit cards, depending on the balance in your bank account, blocking could result in charges for insufficient funds while the block remains in place.

In order to avoid the trouble that can result from credit card and debit card blocking, you can take the following steps:

• When checking into a hotel or renting a car (or if another business asks for your card in advance of service) find out if the company is "blocking," how much will be blocked, how the amount is determined, and how long the block will remain in place.
• Use the same credit card or debit card at the start of the transaction that you plan to pay with for hotel, motel, rental car, or other "blocked" bills. Find out from the clerk when the prior block will be removed.
• If you do pay with a different credit card or debit card, by cash, or by check, remind the clerk that you are using a different form of payment and ask them to remove the block promptly.
• Call your current card issuer to inquire if they allow blocks, for how long, and from what types of merchants. If they do, you may want to think about getting an overdraft line of credit from your bank. Ask about a plan that always automatically covers the overdraft and does not involve a separate bank decision on whether or not to pay it each time. Although you could incur some interest on this plan if you don't pay off the amount fairly quickly, you would not have an overdraft that goes unpaid. Talk to your bank about an overdraft line of credit, how it would work, and how much it costs.

To reiterate, when looking for a credit or debit card, it's important to consider whether the issuer permits blocks, for how long, and from what types of merchants. You may want a card from an issuer that uses shorter blocks.

Card Issuers Encourage Debit Card Signature Transactions

Debit cards provide a choice for consumers who make a purchase with their plastic. Debit card users can opt to go the "debit" route and enter their personal identification number (or PIN) when making a transaction. Or, they can decide to use their debit card as they would a credit card and sign for the purchase. When it comes to bank issued debit cards, there are a number of ways the bank encourages you to put down your John Hancock.

Upon first thought, there may seem to be little difference between keying in your PIN number or signing your name for a debit card purchase. But in fact, the decision could have an impact on your wallet.

With consumers increasingly choosing to make debit cards their plastic of choice (debit cards now make up over one-third of all card transactions), banks are looking for a way to increase business from this consumer choice. With experts noting that signing for debit purchases is more profitable for the banks, they are encouraging customers not to stick with the PIN.

Although banks make more money from signed debit card transactions, the extra cash is made off merchants, not consumers. Merchants pay higher fees when consumers choose to use their signature. With PINs, merchants pay credit-card companies and their bank partners a flat fee to process the debit transaction, generally between $0.10 and $0.50. However, the merchant fees for processing a signed debit transaction are a percentage (typically 2.49%) of the transaction value.

One method some banks use to persuade cardholders to sign for debit purchases is by charging "point-of-sale" fees for entering a PIN. These banks charge the consumer $0.25 to $0.50 per transaction, while other tack on a monthly fee of $1 to $2. Whether you personally will pay a fee could stem from which bank you use, where you live, and even the type of account you have. According to an estimate from the American Bankers Association, 13% of consumers pay such fees. Industry watchers note that although POS fees have existed for years, they have become more common as consumers make everyday purchases with debit cards. At present, only two of the largest U.S. banks have been charging POS fees -- Wells Fargo and U.S. Bancorp.

Meanwhile, banks are also using incentive programs like those offered for reward credit cards to spur signature-backed debit transactions. Signing for debit card purchases can reward consumers, including those whose cards bear the imprints of big names like Visa and Citi, with all sorts of rewards. However, with a PIN, rewards take longer to earn, if they can be had at all. So even if you pay a fee for your debit card, you could be missing out on rewards if you choose to enter a PIN when making a purchase. Therefore, it's important to read the fine print in your card agreement.

Debit Cards vs. Credit Cards

Credit or debit? That question will sound familiar to anyone who has presented their credit card or debit card when making an in-store purchase. But before you even get to the register, you should ask yourself that very same question in order to decide if you want a debit card or credit card in your wallet.

Current data suggests that debit cards are more popular with consumers than credit cards. A recent TNS Financial Services Consumer Credit Card Program Study indicated that over 60% of consumers prefer using debit cards to credit cards as a payment vehicle, because debit feels more like "real money."

TNS reported that between 2002 and 2005, the number of households using an ATM or debit card grew from 47% to 60%. Additionally, debit card transactions now make up the same value of in-store purchases as cash (each around 33% of total transactions), according to the 2005/2006 Consumer Payment Preferences study from the American Bankers Association and Dove Consulting. While cash payments have remained steady at 33% since 2001, debit card use has grown from 21% of in-store purchases that same year. Meanwhile, credit card use dipped from 21% of in-store purchases in 2001 to 19% in 2005.

Debit cards are also gaining favor as a form of online payment. Based on data from JupiterResearch in American Banker, debit cards will account for 46% of all online purchases by 2010, compared to 41% in 2006. The same data forecasts a slide in credit card use to 35% of all online purchases in 2010 from 41% in 2006.

There are reasons that debit cards have become the plastic of choice for many consumers. Debit card payments come out of a checking account immediately, alleviating concerns over credit card bills and interest rates. Since debit cards are linked to a checking account, they can limit purchases to items cardholders are able to pay for at that moment, unlike credit cards. As such, debit cards may be a good option for those Americans that are carrying a debt load. But be careful not too overspend on a debit card, also, as doing so could produce a nasty insufficient funds fee. Separately, using a debit card with overdraft protection means that debit charges can be paid out of your savings account or a home equity line of credit when your account becomes overdrawn.

Also, skillful debit card users enjoy low-to-no cost for paying with their plastic. The majority of institutions do not charge for debit card transactions, making paying with one a no-cost way to practice some financial discipline.

However, debit cards are not superior to credit cards in all respects. Consumers without a debt burden who pay their balance in full each month can benefit from up to 40 days of free float, or the time between when a purchase is made and when you actually pay your bill. With debit cards, the money is withdrawn from your account almost instantly.

And, that immediate withdrawal with a debit card is the reason credit cards offer greater protection for consumers. With a credit card, you have the option of withholding payment should you be unsatisfied with the quality of a purchase. But when paying by debit card, there is a good chance the merchant already has your money by the time you realize something is wrong with the purchase.

The law is on your side when it comes to credit card purchases. The Fair Credit Billing Act basically means you have zero liability for fraudulent purchases, poor-quality or damaged merchandise, or for merchandise that was never delivered. Also, credit card users are not required to pay any amount that may be in dispute, meaning the cardholder retains use of the fund for the amount in question until the issue is resolved. While policies have changed in favor of debit card transactions (providing greater protection and in many cases zero liability), you still don’t have the degree of consumer protection with a PIN-based card as you do with a credit card. The zero liability provided on debit cards is only a policy and therefore can change at any time, like interest rates and fees.

In the event of a debit card theft, the victim may only find out after the money has been withdrawn from the account. Should you be aware that your debit card is lost or stolen, you can take action. The Electronic Fund Transfer Act gives you the right to dispute an error on your bank statement and gives you some protections. For unauthorized card purchases, your liability is capped at $50 if you notify your bank within two days of realizing your debit card is missing. But between two days and 60 days, you could be responsible for paying up to $500 of a crook’s spending spree. If you wait more than 60 days to contact the bank, you will be stuck paying every cent of the unauthorized charges, which could cause you to lose everything in your checking and overdraft accounts.

While debit cards are increasingly being used by consumers, there are still a number of ways in which credit cards remain superior. Due to more limited consumer protections, a debit card may be best used for making smaller, routine purchases such as gas or groceries (although several rewards credit cards offer 5% cash back for these purchase categories).

Paying by debit is quick and easy, and will not result in you paying any interest. However, as mentioned earlier, debit card users do not experience the float enjoyed when making a check or credit card payment. When making debit card payments for large purchases, it is best to do so at a store that allows you to thoroughly inspect the merchandise before buying. Also, large purchases may need to go on your credit card due to the fact some debit cards carry a maximum daily spending limit. Finally, credit cards remain preferable for ordering merchandise over the phone or the Internet, as they allow the consumer greater recourse in case something goes wrong.