Credit vs. Debit: The Hotel Edition

As a relatively experienced traveler and hospitality industry pro, I feel it is my duty to make sure everyone is on the same page about the use of debit cards.  You may have noticed the debit card policy at a hotel where you have recently stayed. Most places post their policy and others just assume you know because it is the industry standard.  However, as common as it is, many people seem very confused about these policies.

(Image via LifeHacker)

When checking into a hotel you will be expected to put a credit card on file. Each day the computer system used by that hotel will place a pending charge on your credit card account for the amount you owe for that day. If your card is declined, they immediately know you do not have enough funds available. If the card is not declined, the hotel can rest assured that they will be paid at the end of your stay. The funds are then held aside for that hotel for 5-7 days. The funds are not able to be accessed by the card holder because the hotel has, more or less, asked the bank to reserve that money for them. Conversely, the hotel has not been paid. When you go to check-out at the end of your stay, the front desk clerk will finalize your payment and close out the pending charges. At this point the funds that had been set aside by the credit card company are then transferred to the hotel. Easy.

Most credit cards come with a fairly high limit. Let's say the credit limit is $8,000. If you are staying 3 nights in a hotel that costs $125/night you will receive a pending charge of $125 each night of your stay. So, now your credit card company is holding $375 from your account to pay Hilton or Marriott or Holiday Inn or wherever you are. Let's say at checkout you decide to pay in cash instead of closing out the final amount on your credit card (you must have won big in the casino last night and have cash on hand - go you!). In this case, you will still have a $375 pending charge on your credit card statement even though you have paid up in cash. At some point in the next 5-7 days the credit card company will release this pending charge. You don't care though because you have this fairly high, $8,000 credit limit and didn't even notice that some of that money had been set aside and was therefore untouchable for a week or so. With a credit card, there is rarely an issue but if you are using a debit card, it can get a little more difficult.

First, you must know that the way a bank treats a debit card is exactly the same as the way they treat a credit card. However credit card and debit card accounts do not react the same way. Yes both types of cards look the same, can be swiped by a customer service representative and will transfer your money to someone else electronically however, that is where the similarities stop.  With credit cards you are dealing with credit - imaginary money that the credit card company assumes you are able to pay back to them. You are borrowing money; you don't already have it.  With a debit card, you are strictly using the funding that is currently in the account the card is tied to. If you only have $500 in your account and we run though the above mentioned scenario, you might run into some financial problems. With the debit account when the $375 is being held in a pending charge you cannot access it meaning you now only have $225 available in your account.  Let's pretend that you had held your room stay on your debit card, at check out you paid cash. You leave the hotel and walk next door to the rental car company and try to rent a car to drive home. The cost of the car is going to be $250. You try to put that car rental on your debit card. It is declined. You only have $225 available because you currently have $375 in pending charges that will not be released for at least 5 days. You call the hotel to explain the situation and they offer you no help - they can honestly do nothing about it at this point. It is up to the financial institution to release the charges.

The moral of the story is that it is important to understand how your different accounts work. You may get lucky and have a front desk agent who points out the policy for you but do not count on it.  Many people do not have credit cards - this is one instance when it may be very helpful to have one! The hotel will allow you to pay up front but you still have to have a credit or debit card on file for incidentals and may still end up with pending charges. Be sure to clarify first thing!