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The Downside of Debit Cards

Written by Nickel - 22 Comments

Yesterday I wrote an article praising the convenience of debit cards. Today, I thought I’d shed some light on one of their major potential downsides…

Last week I was out of town on a work-related trip and staying at a Holiday Inn. When I reached first reach my destination, I was greeted at the check-in desk by a sign warning debit card users about their payment policy. It seems that if you use a debit card at this particular location, they will charge your account for the cost of the room plus a projection of your incidentals (phone use, restaurant charges, etc.) and an unspecified deposit. The sign went on to state that unused funds would be restored to your account within 7-10 days of checkout.

While the policy of placing a hold on a portion of your credit line or bank balance (in the case of credit cards or debit cards, respectively) is pretty standard stuff nowadays, the policy at this particular hotel seems a bit over the top. Yes, I understand exactly why they do this — to ensure that funds are available to cover all of your potential charges, but… Having a portion of your credit line (or even your checking account balance) temporarily put on hold is fundamentally different from having money actually withdrawn from your checking account and then refunded to you in 7-10 days if it goes unspent.

In my case, I was using a credit card so it didn’t matter. But I’m still curious…

Has anyone else run into a similar situation? If so, how long did it take to get your unspent funds back? And does anyone have a clear idea as to how quickly holds drop off your account if they choose that route instead of holding your money hostage?

Published on May 8th, 2007 - 22 Comments
Filed under: Banking, Credit Cards, Travel

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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22 Responses to “The Downside of Debit Cards”

  1. 1
    wes m Says:

    Enterprise and Budget car rental companies both do this; for Enterprise, the hold is a flat $250 (from the sign in a local office) and Budget uses a formula to calculate it. Either way, it’s annoying, especially for those of us who don’t carry credit cards..

  2. 2
    Pretty penny Says:

    IMHO, the biggest downside to debit cards is related to this post: errors affect your real bank balance immediately. With CC I can dispute charges, and anyway have 25 days of “grace” before I have to deal with it. Nothing would infuriate me more than having to camp out at the local branch because checks started bouncing due to fraud or merchant dispute.

  3. 3
    Blaine Moore Says:

    Wow…I never use my debit card, but if I did, I wouldn’t stay there.

  4. 4
    shouldbeworking Says:

    This happened to us on our way back from the Frozen Four NCAA hockey tournament. My wife was told by the hotel manager that they would “charge” an extra $150 to her account for a deposit and incidentals. We were told the charges would be removed in 10 BUSINESS days. We weren’t too excited about her money being held hostage for two weeks, so we opted for the credit card.

  5. 5
    bonnie Says:

    Something like this happened to one of my tenants recently. They stayed at a hotel for the weekend and were double-charged, with the money coming from their debit card. This was after they had written a rent check to me. I never understood if this was just an error, since the double amount seems like a lot to be holding for “incidentals,” or if it was a policy thing. Either way, it was a couple of weeks till they got the money back. They had to scramble to cover the rent check because I had already deposited it.

    I haven’t come up with a reason to use a debit card. I got one earlier this year with rewards points attached to it, thinking I could use it at the one or two places I shop that don’t take credit cards, in an effort to get cash back on just about everything I spend money on. However, after using it for a couple of months, I found out that you don’t get points when you use it at a place where you have to put in your PIN, only non-PIN purchases. Does anyone know the logic behind that? What difference does that make?

  6. 6
    jos Says:

    i had funds held hostage on my debit card last year… a hotel in Vermont held 200 for “security” i didn’t get it back for 2 weeks and i wasn’t even notified they would be doing it at all… made me so mad

  7. 7
    Sam Says:

    A couple of thoughts. I use my debit card for any and all transactions. I also get points for my debit card purchases and don’t input my pin number, 99% of the time you can hit cancel if the machine asks for your pin number, to use the debit card as a ‘credit card’. My debit card has a Visa logo and some credit card protections (i.e. I’m only resposible for the first $50 if the card is stolen). I’ve run into a few glitches when using a debit card for travel – most of the time I avoid rental car, airline, hotels, etc. that treat my debit card differently than a credit card (i.e. holding and refunding money, etc.) I do have a credit card that I can use for travel purposes and also use for business travel expenses.

  8. 8
    BillyOceansEleven Says:

    A similar issue to watch out for with debit cards is holds for pay at the pump gasoline transactions. Typically when you swipe your card at the pump (debit or credit) it authorizes the card for a relatively high amount (anywhere from $50 to $100) since they don’t know in advance how much gas you will pump. When you finish pumping they will put through a charge request for the actual amount, but the original authorization will typically stay on the account for a couple of days before being canceled. If you used a credit card it is no big deal (unless you are right at your credit limit), but on a debit card it can cause real issues. Because the bank still thinks that your account could be drafted for the amount of the authorization, those funds will be held until the authorization is canceled. If your balance is low, that could mean other items coming through on your account could be returned for insufficient funds since the held funds aren’t part of your available balance.

    I am very anti-debit card. This whole debit card thing just seems like a way for banks to shift the risk from themselves to their customers.

  9. 9
    Chris Says:

    Around here I have never found a station that authorizes $50 or more when pumping gas. They authorize a dollar, then the real amount goes through a few days later. I only use my credit card when traveling, so I do not know if stations in other parts of the country do this.

    Gas stations at grocery stores, I have found, do not put a hold on your money. They just charge you for the full amount that you pumped.

    Hotels and car companies have always held money like this. The debit transaction takes a week or more to be refunded. You can always reserve/hold the room/car with a credit card and pay with debit after you have the final bill.

    That particular hotel might have been different (as in charging your debit card extra even if you are checking out and are paying the final bill – not sure from the article). Fortunately these days it is a piece of cake to just let them run the credit card and transfer the amount from your checking account to the CC when you get home. I only use credit cards when I travel, never my debit card.

  10. 10
    BigD Says:

    This happened to me with Enterprise (Greensburg, PA) as well, but it wasn’t a flat $250 fee. Mine was calculated for a 15 day period for $167 (give or take), however I used a credit card instead of a debit card. I have seen this practice at Dollar RentACar (Las Vegas) as well. The holding fee was $300 (give/take)!! I used my debit card at Dollar. Strangely enough, both places took the money and refunded it to my account within 2-3 days, and then ‘officially’ charged me when I returned the car.

    Car Rental Tip: If you are in Las Vegas, Payless Car Rental is a good company. Their rates aren’t bad. But what made me happy is that I forgot to fill the gas tank when I returned the car. The lot attendant didn’t charge me for the 10 missing gallons (@4.50/gallon). So, no fuel surcharge if you are polite when you return your car and have a good attendant!

  11. 11
    michael Says:

    I work at a hotel and we have a NO Debit card policy. The reason that we do this is because of our register/reservation system.

    The register software was written before debit cards became all the rage, so there is not option for debit or debit card detection.

    We did try to take them for a little while and the problem we incurred was multiple billings. If we authorized for $100 it would go through at the bank 4 times making the total held $400 The only way for us to know this happened is if the guest checked thier bank account.

    If it did go through multiple times this is what we had to do to get the extra funds released.

    1. Must be during bank hours 9-5pm
    2. Call the bank and get thier fax #
    3. Fax over a letter stating the guest name, some account info, the amount to release, all on company letterhead.
    4. And even after that it may take a few hours to actually show up in the account.

    So if this were to happen on a friday or saturday night the guest would have to wait until monday for thier funds. So think about 5 nights at $100 and then throw a multiple transaction on that amount $2000 is now bieng tied up. Now after that amount throw in overdraft fee’s etc.

    The reason the register system isnt upgraded immediatly Is because the entire register/reservation system needs to be updated which can cost over $50,000 in software, hardware and information transfer fee’s.

    We do not accept them to avoid this type of situation and dont want to ruin thier visit by holding all thier money. All buisnesses have the option of what forms of payment to accept. Some places are cash only, credit only, no personal checks, So why not no debit.

  12. 12
    Phil Says:

    Banks and overdraft fees. I found out the hard way. In my opinion the main reason that overdraft charges occur is the way that the banks computer processes charge transactions, when you use your ATM/debit card (visa or MasterCard) as a charge card. I’ll explain why.
    Let’s say you have 100 dollars in your account and you go to your local Mall and make a purchase for 40 dollars and use your ATM card as a debt card (charge card) against your checking for the transaction, well, you should have 60 left in your account, right? You would think so wouldn’t you? You start with 100 charge 40, 60 left right? The next day you go to the ATM to make a withdrawal it says you have 60 dollars available, right, ok you take out 50,you should have 10 left…. Right? 50 40 =90, you started with 100 – 90 = 10 left right?
    Wrong, you just triggered an overdraft when the transactions hit the bank computer that night, according to the banks computer, the 40 that you charged for the purchase the day before was a charge card transaction, even though they deducted the money from your available balance right away, there is still going to be a hold of 40 dollars against your account until the 40 charge transaction clears the banks computer which takes about 3 to 4 days and the hold drops off your account.
    So even though the ATM says you have 60 available, which is what you have left in your account, any withdrawal over 20 will trigger an overdraft charge, until that 40 dollar hold gets cleared and dropped from your account. Why? When the transaction hits the bank computer that night. It sees the 60 that you have, but, it also sees a 40 hold on the account for the charge transaction that hasn’t cleared yet, so effectively until that hold drops from you account the banks computer will automatically kick out an overdraft fee for any withdrawal above 20 dollars.
    That’s right folks when you use your ATM/debt card (visa card/MasterCard) as a charge card the bank is putting a hold for the amount of the charge against your account, even though they have already adjusted your balance for the amount of the transaction …That’s right, THEY HAVE A HOLD ON AN ALREADY ADJUSTED ACCOUNT BALANCE, AND THAT HOLD REMAINS UNTILL THE CHARGE TRANSACTION CLEARS AND THE HOLD DROPSOFF YOUR ACCOUNT.
    I don’t know if your banks computer is set up to figure transactions this way, but I know of 2 that do, I had an account with one of them for years and never had a problem with my account until I got their new ATM/debt MasterCard and started using it as a charge card. That’s when I started to have problems and overdraft charges. I finally figured out what was happening and brought it to their attention, about what was triggering the overdraft charges and got into a long heated discussion with them about it. I got the overdraft charges back, after going over line for line on their computer, and proved that I had the money in there, it was just the way that the computer interpreted the hold against the already adjusted account balance that was causing the problems, It was a very hectic undertaking because one mistaken overdraft charge on the banks part can start a chain reaction of overdraft charges. After everything was said and done, I had to change banks.
    So, to some this up, I’ll bet if you have had problems with overdraft charges and you can’t figure out why they’re happening, It’s because you used your ATM/Debit card as a charge card. Your first clue will be, when the bank official sits down with you to go over your account to try and explain the charges, if you hear them start talking about hold amounts against your account because of charge card transactions that haven’t cleared yet bend over because your being screwed.
    Never Use Your Debt Card As a Charge Transaction unless you keep a big balance in your account.

  13. 13
    Ann Says:

    My family just took a trip for Christmas and checked into the hotel with our debit card. Our final bill for the hotel would be $875 for a three night stay and the Hotel put a hold for $2300 on our account. We checked in on Dec 23 and did not find out about it until about 9:30 Pm Christmas Eve and there was nothing that could be done about it until Dec 26th. They had a sign at the end of their check-in desk but had four agents checking guests in. There is no way that you could see the sign, and the agent that checked us in did not mention it to us. The sign clearly stated that $100 per day would be held but their system held $100 per day and another $100 per person, it was 2 adults, 15 yr, 8 yr and 18 mon old. I was livid and insisted that they fax the bank immediately to relese my money. The bank even commented that the amount was outrageous given what the amount of our final bill was.

  14. 14
    jared Says:

    It has happened to me a couple of times, mostly with my debit card. I was on a trip to a convention and I showed my debit card (as per hotel requirement) in case I wanted to use the premium channels or mini bar. I didn’t use either so I wasn’t charged.

    I get home to see my bank account at -400 dollars. The hotel had charged my debit card for our room expenses instead of the school that I was representing. They denied that they ‘billed me’ rather they were ‘holding’ the money as you said for 7-10 days. I was flat broke but my bank was nice enough to not charge an overage fee and my school worked with the hotel to get it fixed quickly.

    Lately I’ve noticed more and more companies doing this money ‘holding’. Apple Inc is ‘holding’ 130 of my money until I get a replacement part for an under warranty computer. I recently updated my billing info on a number of services I use and most took a 1 dollar ‘verification’ hold on my credit card which is fine, but one company took 20 dollars for 10-15 days!

    Overall I’ve noticed they do this far more with debit cards rather then credit cards but what really irks me is that many of these companies outright lie when asked if they will charge your card. To them it isn’t a charge or a payment to them, just a ‘hold’. But I think it just makes it easier for them to lie later and say that you didn’t follow through with an agreement and now they can keep your money.

  15. 15
    Tia Says:

    That same thing happened to me tonight, I actually got gas for a friend of mine, 29.19 or something. THEY put a 90 hold on my checkings account, which is totally stupid because they really should set it up so it takes out just what you authorize. The morons over at VISA were rude, but they at least explained that to me that pumps will do that to make sure that you have the funds in your account in case you get that much. Which doesnt make any sense as well. Although, it makes me really pissed cuz it looks like a huge fraud thing as well as giving me a small balance making me nervous about over draft fees and everything.

    Ugh, I HATE BANKS.

  16. 16
    ed Says:

    UNIQUE PROBLEM! or so it seems.
    Purchased a computer at WalMart with a Debit card. Swiped and PIN’d the VISA debit card and an ‘Insufficient Funds’ was returned. The account had the funds. With that transaction, my CU account was debited the $323.63 but WalMart was NOT paid.
    WalMart (and I) thought the transaction failed. I swiped and PIN’d again and the Approval gave WalMart their money. 4 days later I discover that I’m out $323.61. Went up in smoke. CU sez BOTH transactions were paid.
    All the WalMart data (I was there) sez the1st transaction was Not Paid.
    WIth CreditCard I’d be out $50 Max. With DEBIT card I may be out the whole $323.61.
    Something Wrong with this Picture!

  17. 17
    dave g Says:

    Debit Cards vs Gas Stations….Many gas stations will charge your debit card twice the amount incurred at the pumps; keeping that fact that they want to make sure the funds are available and payable. They keep the funds for up to four days; so if you have low funds; you’ll be paying NSF checks coming in during that period. Now imagine that they are doing this to two hundred thousand people a day; say at 20.00 a whack.
    Who gets the interest on $ 4,000,000. kept for 4 days.
    The same goes for hotels who have been known to keep
    these funds for up to fifteen days; as the interest piles up; did they send you an interest bearing check; back??
    Answer: No; they keep your interest and all interest; its another way for your debit card to work for them; these hidden practices have cost Americans; 28,000,000 in NSF funds in one year!! Also made oil companies 177,000,000 in interest also in one year!! Its better to use a credit card or cash at the pumps; its better because you can afford to eat, feed your families. These are only two of the ways your debit cards work for big business; there are another 218 ways that are more sinister..Pay cash for gas.. Dave G.

  18. 18
    Karen Branum Says:

    I bought the most expensive chicken sandwich, EVER!! Chik-Fil-A and SunTrust bank helped themselves to $195.21 of my money and there was nothing I could do about it.
    Put your debit card away…use cash and get a receipt. this will not happen to me again!!!
    Karen B.

  19. 19
    Linda R Says:

    I went to a restaurant in Utica, MN called the Golden Harvest Cafe & Bar and was double charged, I called them about it and the owner claims it was charged only once yet my bank statement says twice. I will never go there again. The restaurant or the bank will not do anything about this matter. WOW what an expensive meal. I cut my debit card up and will not use it again and I have changed banks

  20. 20
    In the know Says:

    FYI – regarding credit card transactions and holds. I work as a computer consultant for small businesses, including several hotels. I’ve set up many of these systems and speak from 20 years of experience.

    Here’s a bit about how credit card transactions work. First, the money doesn’t go to the merchant in real time. They just authorize the funds in real time, then ask for the credit card processor to transfer the proceeds of several transactions together in what’s known as a “batch”. Typically, a batch represents one day but it can be a shorter or longer period of time. The merchant can do either a “pre-auth” or an actual authorization…what we would know as a “charge”

    When you initiate purchase on a credit card (or on a debit card when processed as “credit”), the merchant typically does something called a “pre-auth” transaction. This tests your card to see if you have funds available, and reserves funds to pay an actual charge later, but no money moves because of a pre-auth. Often the pre-auth is done before the merchant knows what your bill will ultimately be…before you leave the hotel, or before you start to pump gas or return the rental car. Although from the customer side of it one might think that the “hotel is sitting on my money”, the truth is that the money doesn’t move anywhere. You bank is holding it. No money changes hand for a pre-auth, and they all have an expiration date that’s typically a couple of days away. They have to guess or calculate a number to use for the pre-auth. This guess is a best-effort to make sure they will get paid in full but without unduly inconveniencing the customer, and it can be hard to do.

    So when the actual charge comes through, the merchant does a hard “auth” on the card which reserves funds for them from the customer’s account but also puts a record in the “batch”. The is sort of a to-do list of charges and credits that need to be processed. Like the pre-auth, the hard authorization happens in real time. But still, the funds don’t actually move until the batch is processed. The merchant typically gets their money about 2-3days after the batch is processed.

    The pre-auth drops away in a couple of days automatically, or if the merchant’s software is working properly, it is proactively canceled when the actual auth comes through the card. The hitch is that pre-auth is done in real time, but the actual charges happen when the “batch is run”, or typically over night that night. And not all merchants actually match up the pre-auth with the actual charge and release the pre-auth early….they just let it expire away in a few days. So the pre-auth is unlikely to drop off before the next morning and may well take several days.

    Let me be clear with the next part of this: The merchant determines the amount of the pre-auth, and the length of time the money is held. The credit card processors and banks do nothing but respond to electronic requests from the merchant. The merchant probably doesn’t know this and won’t believe you, because this is all handled by software that they don’t really understand. There’s no point in arguing with the clerk at the desk or gas counter. They don’t control it and couldn’t reverse it if they tried. It’s all done by the software that processes their credit card transactions. The folks at the counter – even the manager or general manager – will likely believe that the banks are doing all this. But the request to hol funds is formed in their software or their credit card terminal, and the banks just respond to that. Think about it: How could the bank determine what hold would be appropriate for a given merchant? Is this a dime store or a high-end resort? Do we hold $5 or $5,000? The bank couldn’t begin to guess. The merchant’s software makes a request for a pre-auth or an auth, and the bank says yes or no to it based on available funds etc. Period. Then if it was a pre-auth, it expires away in a few days (or longer if the merchant’s initial request specified that), and if it’s an actual authorization, it is held with the “batch” to be processed together with all the other accumulated transactions.

    And here’s another shocker: the merchants who do insist that their software match up the transactions and drop the pre-auth earlier save money on the fees they pay to process credit cards. But many don’t realize this or don’t want to pay to have it changed so it’s status quo.

  21. 21
    HOTEL GM Says:

    This posting could not be more incorrect.

    An authorization is a promise or guarantee of available funds which is issued by the bank. In doing so, the bank is promising the merchant that the money is there and being held for them should they decide to claim it.

    Every bank, credit union, etc has a different policy as to the length of the authorization. Some are as little as 48 hours, some up to 2 weeks. I have dealt with hundreds of different credit card companies trying to get peoples unused authorizations released.

    The merchant is most often powerless to get the bank to release an authorization before it’s policy requires. I have encountered a small handful of bank reps who, after receiving much grief from a very angry card holder, will agree to send the hotel a form, which is basically a written statement acknowledging that the authorization was done in error, that we will not submit a charge for the funds, etc and must be signed by the GM, often requiring some sort of accompanying proof, such as letter head, or business cards. And that usually only occurred when we had made an actual error, such as the clerk authorizing the charge for $3500 instead of $350.

    I could count the actual number of times that has been allowed, as the norm is that the authorization will fall off in x number of days, as per the particular bank’s policy, and not before.

    Nobody hates debit cards more than hotel managers. Many hotels have stopped accepting debit cards all together and most have a sign or a disclosure form you must sign if you insist on using them. There is no way the merchant has any control over the release of authorizations- they are not a promise made by the merchant, they are a promise made by the bank to the merchant.

    Furthermore- NO SINGLE global hotel chain has been able to find a way to prevent this issue. If it was something we had a hand in don’t you think Hilton or Marriott would have figured out a solution other than “we don’t suggest you use a debit card”?

    By the way, as a very seasoned Hotel GM, having managed hotels for 3 different global chains, I STRONGLY discourage the use of a debit card at any hotel unless- you have tons of money in your account and won’t miss it if the bank holds a chunk of it for several days.

  22. 22
    Former Credit Union Employee Says:

    The only reason there are issues with car rental and hotel companies, is because they do not want to pay the extra fees associated with debit card transactions. A debit card transaction is more secure and that extra security comes with a extra security fee. Typically a merchant will pay 1.5% to 2% for a signature-based (credit) purchase. However, with a P.I.N. (debit) purchase a merchant is looking at $0.25-$0.35 PER transaction, plus any other fees for the service. Think about, would rather pay a one time 2% fee on a $500 3 night stay or pay up to $0.35 EVERY TIME a customer makes a long distance phone call, use the hotel restauraunt, or gets stack happy in the mini-bar. The company wants to avoid possibly losing $2-$4 a guest per night. With as many people who use hotels a day, that adds up to a great deal of money. So like the GM said above, use a credit card if possible. Until debit card processing companies decide to stop ripping off merchants (thats a whole other post)use it or lose it…well…for 2-10 business days at least.

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