Credit Card Authorization: How it Works

Credit card authorization is the process in which a person’s credit card is scanned, read and approved or denied during a sales transaction. In most cases credit card authorization takes a matter of seconds to complete. A card is scanned or entered into a card reading machine and the information is sent through a phone or modem line to the bank or company that issues the card. If the account is in good standing and has money available, the transaction will be approved. If the account is in bag standing, the transaction will be denied and there will need to be another form of payment given before the item will be released as a sale.

Though that sounds pretty simple, there are other acts that are referred to as credit card authorization as well. One of these is in the form of an authorization hold or pre-authorization. If you have a credit card, you may be familiar with this concept, also known as a hold. Gas stations are notorious for using holds on cards.

When companies process credit, before the actual money is taken from your card, the business must close their batch, which is a technical term meaning they are withdrawing the money from all credit accounts they have done business with. Many companies only do this once a day, others may only do it once a week. Technically before the company closes the batch, there is still money on the card which is why credit card authorization is important.

The basic way this type of credit card authorization works is this: you have a credit card with a $100 limit. At a gas station, you use your credit card and charge $30. Immediately your available balance would got to $70 but your actual balance would still be $100 since the real money has not yet been taken until the gas station in question closes their batch. This can be dangerous for a consumer who does not pay attention as they may glance at their actual balance and think there is more money available than there really is.  If they aren’t careful, it can lead to a lot of unnecessary fees.

Banks have been under a lot of fire recently due to confusion when it comes to the actual and available balance. New legislation has caused many banks to make this process easier to understand, but there is still a lot of confusion and a lot of people getting fees that are, to many, quite unfair.  Some people may say this isn’t right and credit card companies and banks shouldn’t allow this practice, but remember when you opened your credit card and got the multi page terms and conditions of use? Guess what was in there...yes, the explanation of this process and the fact that you have agreed, by simply using the card, that this practice is acceptable.

Credit card authorization practices may have changed slightly, but probably not enough for most consumers. It is important for the consumer to remember that the practice comes from the banks and credit card companies and not necessarily the merchants they are doing business with.