I’ve been buying gas with my PayPal card whenever there is a balance collecting dust.
There are not one, not two, but three financial transactions that occur when you swipe that card at the pump:

Photo by ninjapoodles

• Pre-authorization
• Payment
• Backup Funding [update, 2010: you have to opt-in at your bank for this service]

One of them caught me by surprise and cost me $35 in overdraft fees!

Before you pay with PayPal, make sure you know what’s going on behind the scenes.

Pre-authorization

When you pull up to the pump and decide to pay for your gas purchase with any credit or debit card, the gas station will obtain a pre-authorization prior to allowing you to pump a drop of gas.
I chatted with a knowledgeable representative from PayPal and learned an important lesson.
The PayPal rep told me that they typically receive pre-authorizations in the amounts of $1, $10, $75, or $150.

Payment

Having received authorization, the pump allows you to buy as much fuel as you want.
Here is the first booby trap: the total amount of your gas purchase is charged to your card and creates a second hold on the funds in your account!
That’s right. If the pre-authorization was $1 and you purchased $40 of gas, there had better be at least $41 in your account. I shudder to think about the higher pre-authorization holds!

Backup Funding

Suppose you don’t have the required funds?
Well, with a regular bank, you would be subject to overdraft fees, unless you previously arranged to have the difference transferred from another, linked account.
Unfortunately, this is rarely a free service, so you are better off running to the bank (or logging in to your online access) and transferring the funds yourself.

PayPal provides the same service, for free.
You select an account to be the source of backup funds, should your PayPal account balance be insufficient for a particular transaction.
Your backup funding account can be different from your primary account, which sort of begs the question, “What’s the point of having an account designated Primary?”.

Most likely, the primary account is the one you also use for backup funding but, if you do choose another account, be aware that changing the primary account to another bank account will not automatically change your backup funding source!
I have my reasons for using two accounts, and those reasons have nothing to do with the transaction process.

Overdraft

On the surface, that may not seem like a big deal unless, like me, you assumed that your backup funding source is the same as the new primary account. If you stop keeping sufficient funds in the “other” account, and your PayPal balance is insufficient for a particular transaction, PayPal will attempt to instantly transfer the difference from that “other” account. This is where the second booby trap lies in wait.
Your greedy bank will allow this transfer to occur and gleefully charge you either an overdraft fee or the linked account overdraft “protection” fee.

Minesweeper Tactics

The PayPal rep gave me step-by-step instructions for changing my backup funding source.

1. Log in to your account at https://www.paypal.com/.
2. Click the “Profile” sub-tab.
3. In the Financial Information column, click “PayPal Debit Card.”
4. Select the debit card to change the back up funding source.
5. Click “Edit Backup Funding.”
6. Select the radio button for the backup funding source and click “Submit.”

Emergency Funding

Being able to purchase a tankful of gas with just a one dollar “hold” is something that my local banker told me is a “feature” that my card offers and it’s nice to know. Be sure to test that out with your own card before the need arises.

Just don’t forget to transfer the funds to cover it!