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Check 21 Law Will Eliminate "Float", Cause
Checks To Clear - And Bounce - Faster
by Bob
Lowe
October 28, 2004 (updated 11/2/04)
It’s called "playing the float." The practice
is fairly widespread among many customers who have a checking
accounts at banks, credit unions and other financial institutions.
Say, for example, on Friday when you leave work, you have
$100 in your checking account. You and your friends go out
for happy hour at a local bar, where you write a check for
$50 to pay for three rounds of drinks. Then you and your date
decide to finish off the evening with dinner at an expensive
restaurant. When the server brings the bill, the tab is $75.
Which means that if you write another check for $75, you will
be overdrawing your account by $25.
No problem, you say. On
Monday, before work, you will stop by the bank and deposit
the additional $25 to cover the overdraft. By the time that
$75 check reaches the bank, you will have the funds to cover
the temporary deficit.
Or let’s say your $117 utility is due on Wednesday.
But you only have $18 in your checking account and you don’t
get your $500 paycheck until Friday. So you write the check
for $117 and send it to the utility company, figuring by the
time it is processed, you will have more than enough to cover
the $117 check so you won’t bounce.
In other words, you use the "float" – the
period between when you write a check and when it is withdrawn
from your account – to give yourself a short-term loan
at no interest. Starting today, consumers will no longer be
able to rely on the float. A new federal law, the Check Clearing
for the 21 Century Act – commonly known as Check 21
– will essentially put an end to that practice.
Check 21 allows businesses and creditors to scan your check
through a machine that makes an electronic image of the check
and use that image to deduct the funds from your account --
even on weekends in some cases. It will mark the end of the
paper check system. Not all businesses and banks will implement
the Check 21 law right away. But eventually, most or all of
them will in order to cut down on fraud.
Although banks will save money by not having to process insufficient
funds checks, they are not obligated to share these savings
with their customers. Some merchants started using a modified
form of the Check 21 system even prior to today. These retailers
would take your paper check, perhaps have you sign the back
of it, scan it, and return the check back to you.
The impetus for this law came from the terrorists attacks
on Sept. 11, 2001 and the resulting transportation delays.
Because paper checks were transported by trains, planes or
trucks, it took anywhere from 2 to 5 days before they actually
got back to the bank for withdrawal from the accounts. In
the aftermath of 9/11, the extended delays caused major cash
flow problems, which led to the legislation to shorten the
processing period.
Many bank customers are unhappy with the new law because while
it speeds up check processing, it does not expedite he check-holding
policies on deposits. Financial institutions are allowed to
hold a local deposit for two days and out-of-town and payroll
checks for up to five days before allowing customers to withdraw
funds on the balance. Funds from U.S. Treasury checks, money
orders and cashier’s, certified or teller’s checks
are supposed to be available for withdrawal one business day
after they are deposited.
There is no provision in the law that shortens the period
that allows banks to put a hold on check deposits before releasing
the funds. What this means is if your employer sends your
pay checks drawn on an account in an out-of-town bank, those
funds may not be available for withdrawals immediately. This
delay could trigger overdraft charges or additional interest
charges, fees or penalties by businesses if your check does
not clear in time to meet the posted deadline.
Consumers
Union, publisher of Consumer Reports, believes this is unfair
and is lobbying to reduce the time banks can keep a deposit
on hold. The Federal Reserve Board has been authorized to
study the impact of Check 21 on deposits on hold and report
its findings to Congress. But it has 30 months to complete
that study. So there is no immediate remedy.
Check 21 also speeds up the process that many banks have already
implemented in not returning the original cancelled checks
to its customers. An estimated 60% of banks nationwide no
longer return cancelled checks, according to Sandra Bullock,
a financial columnist for USA Today. The law allows banks
to destroy original checks once they have created a digital
image – both front and back with all endorsements –
to serve as substitute. The law allow these substitute checks
to serve as proof of payments. You can get an electronic printout
of any check written from a bank. Some banks already offer
electronic images of checks written online.
In the meantime, consumers can take the following steps to
protect themselves from bounced checks and overdraft charges
and penalties:
- Make
sure you have enough funds in your account before writing
a check for that amount. Forget the float and start treating
check-writing as a debit card transaction.
-
Have your paychecks deposited electronically. Funds deposited
this way are generally available for withdrawal immediately.
- Balance
your checkbook. An astonishing 87% of banking customers
don’t reconcile their checking accounts, according
to Moebs Services, an economic research firm. Use your bank’s
ATM machine, telephone voice response or computerized on-line
service to keep track of your balance.
It’s easier to bounce checks if you don’t know
how much money you have.
-
Take advantage of your financial institution’s services
that cover overdrafts, such as taking money from a savings
account to cover overdrafts in a checking account. Some
banks also have an e-mail alert system that warns of overdrafts,
balances that fall below a certain amount or large withdrawals.
- Review
your monthly statements. They can provide clues on whether
your account(s) is overdrawn.
- Consider
paying your bills online or have funds automatically withdrawn
from your account to pay monthly expenditures.
-
If you overdraw your account, deposit money as soon as possible
to cover the overdraft. Otherwise you will find yourself
penalized for $25 or more for each bounced check, plus a
daily penalty as long as it remains unpaid.
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