Could Merchant Holds Be to Blame for Your Overdraft Fee?
We’ve all been told that the best way to avoid overdraft fees is to keep our checking accounts balanced. Unfortunately, this precaution does not work 100% of the time. You may be certain you have $5.00 in your account for lunch, and that may in fact be your actual balance. But, your available balance could be less than $5.00 which puts you in a dangerous position.
If you spend that $5.00 on lunch, and your available balance can’t cover the purchase, you will incur an overdraft fee. Depending on where you bank, it could be up to $35!
Here’s how that $5.00 sandwich turned into a $45 expense: Merchant Holds.
A hold, also called a pre-authorization, is a way for merchants to verify you have money in your bank account to pay for the goods or services you purchased from them. Since the transfer of money from your account to theirs does not occur in real-time, the act of swiping your debit card holds your money for the merchant until they are able to process all their transactions in one batch. Holds usually fall off after 24-hours, sometimes sooner, as long as the amount of the hold matches the amount of the final transaction. In the meantime, the amount of that hold is deducted from your available balance.
In some cases, holds stay on your account longer than one day; for example, when the merchant hold is greater than the final transaction amount. This happens most often with hotels, airlines, car rentals and restaurants who add anywhere from 10% to 25% to your authorized purchase to cover anticipated gratuity and additional charges.
In the case of the hypothetical $45 sandwich, holds from previous transactions were lingering on the account at the time of purchase. This lowered the available balance which made the system recognize the account as having insufficient funds. As a result, an overdraft fee was incurred.
Here is another example of how this occurs:
On Monday morning, your check register and available balance are in agreement with funds of $100.
Monday night you dine out. Your bill is $40 and you leave a $5.00 tip. The restaurant holds $48.
Tuesday morning you buy a coffee and breakfast sandwich for $9.56. The café holds $11.56.
Wednesday you spend $40 at the grocery store.
Thursday you balance your check register and end up with a remaining balance of $5.44.
On your way to work you stop at your local café again and buy breakfast for $4.53. The café holds $5.58.
Friday, your direct payroll deposit hits. Your transactions from the week have cleared, but you notice an overdraft fee for Thursday’s breakfast. You calculated a left over balance in your account of $0.91. What happened?
The extended merchant holds amounted to $105.14—$5.14 more than you actually had available. While you had sufficient available funds for the first 3 transactions, your available funds for Thursday’s breakfast were insufficient because of the excess amounts being held. Even if the first 3 transactions cleared before Thursday, there is a good chance that the holds were still in place on your account that day because the amount that cleared did not agree with what the merchants processed. When this happens, holds typically stay in place for an extra two days (VISA has a policy in place that holds from merchants can not last longer than 72 hours).
What do you do if you are assessed an overdraft fee because of a merchant hold?
That will depend on your financial institution. Some allow a first time courtesy reversal. Some will consider reversing fees if you can provide a letter from the merchant in question. Typically, though, a letter from a merchant only helps in instances where the payment was received in full but the hold was still lingering (waiver of fees in cases such as these are still up to your financial institution).
Some financial institutions will ask if you’d like to opt out of their Premium Overdraft Service which can be a contributing factor in the higher hold amounts being accepted. Opting out does not ensure your card will be declined for surplus amounts or that you will not be assessed any fees later on.
Most will tell you about the risk of merchant holds and suggest you have a respectable amount of back-up funds to plan for such additional holds (attaching a draw account or line of credit can help). Another suggestion is to ask the merchant about their holds, but more often than not, employees processing transactions will be unable to give an adequate answer.
For those of us without back up funds who have to balance our books to the last penny, it might help to have a credit card to use with merchants who use holds the most: airlines, car rental agencies, hotels, gas stations and restaurants. If this option doesn’t work, (unless you pay off your credit card each month, the benefit is lost), your best bet is to contact your financial institution on a regular basis to verify what is on hold and for how long.
In short, consumers should assume that holds will be placed, available balances will be lowered, and fees may occur. Be sure and have a back up plan or be charged accordingly.
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