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What is a Check? |How Checking Works |Choosing Your Checking Account
The easiest way to give yourself the ability to write checks is by putting your money in a checking account.
Checks are the hub of the banking system. Most of us are paid by check. We buy our groceries and pay our bills with checks. Our checkbook is often the most complete financial record we have.
Originally, checks were hand-written notes telling your banker how much money to pay out of your account, and to whom. Today's standardized, computerized, magnetically imprinted forms are so common, we can't imagine a penciled note having the same effect -- though technically it could.
Checking accounts are also called demand deposit or transaction accounts. Demand means that your money is available when you want it. Transaction means that you can tell the bank to give your money to someone else.
how checks are paid When you write a check, money is transferred from your account to another.
- Jane Morse writes a check against her Los Angeles bank to pay the Adelphi Hotel for her stay in Saratoga.
- The hotel deposits her check in its local account.
- Morse's check is routed to the New York Federal Reserve Bank, which forwards it to the San Francisco Federal Reserve Bank, which forwards it to her bank in L.A.
- Morse's bank verifies her check and takes the money out of her account, but keeps her check to return to her. Then it tells the San Francisco Fed to credit the amount to the New York Fed.
- The San Francisco Fed electronically transfers money to the New York Fed.
- The New York Fed electronically credits the Adelphi's bank.
- The Adelphi's bank then credits its account. The hotel can write checks against the money on the 6th business day after the deposit and withdraw the total amount from the bank by the 7th business day.
when are checks credited? Federal Reserve Bank regulations govern how long a bank can hold a check you deposit before crediting it -- which means putting the money into your account.
Banks can require that you deposit checks with a teller to make the money available promptly. That means deposits in ATMs are usually credited more slowly, especially when you use a machine that isn't owned by your bank.
uncollected funds Uncollected funds are checks that haven't been credited yet.
Your bank can charge you a fee for paying checks that you write against uncollected funds. Correctly estimating your float (the time lag between when you write a check and when it gets back to your bank and subtracted from your account) lets you time your use of deposited funds to avoid penalties.
bounced checks If there's not enough money in your account to cover a check you write, your bank can refuse to honor (or pay) it.
If you cash or deposit a check that bounces, you usually have to pay a fee. You're also charged a fee -- sometimes as much as $30 -- for writing a check that bounces. If several checks bounce on one day -- as they might if you've made a record keeping or mathematical error -- the charges can be staggering. It can hurt your credit rating as well.
overdraft protection One of the best ways to avoid bouncing a check is to apply for overdraft protection.
Overdraft protection is a special line of credit that covers checks you write when there isn't enough money in your account. The bank automatically transfers money to your account to cover the check, and charges you interest on the amount transferred. In the long run, overdraft protection can save you money and aggravation.
Warning: Overdraft protection may not cover checks written against uncollected funds. Check with your bank.
stopping payment Once you've signed a check, the bank will pay it. But there's one loophole.
If you write a check you don't want the bank to pay, or write a check and lose it, you can -- for an extra fee -- put a stop payment order on it. An oral order -- either in person or on the telephone -- is good for 14 days. A written order lasts for 6 months. The bank must honor your order if it's "timely," which generally means before the check is paid. If the bank pays the check anyway, you can demand your money back, but you'll probably have to show proof that you ordered the stop payment.
choosing your checking accounts
With so many checking options available, you can target the account that's best for you. The key is to balance the costs and limitations of an account with the services you get.
You may find that having more than one account makes sense, because it lets to take advantage of the benefits different kinds of accounts offer.
WARNING: Be sure you know which bank services you'll be using, so you can estimate the cost of an account before you open it.
regular checking Many different financial institutions -- from banks to brokerage houses -- offer basic checking accounts.
Usually, you can write as many checks as you want, for any amount of money, and have access to your money with an ATM card.
You don't earn interest on the money your account.
Banks impose a fee for each check or ATM use, monthly charges for maintaining the account, or both. Typical charges are $0.30 a check and $8.00 a month. The bank may offer free checking if you keep a certain amount of money -- a minimum balance -- in your account.
variations on regular checking Most banks offer a range of checking accounts to appeal to different customers.
You can find checking accounts to suit your budget and your check writing habits.
If you write only a small number of checks, for example, you may be able to find an account that will cost you less than maintaining a regular account.
You can also find linked accounts, that combine checking and savings accounts. Opening a linked account can sometimes save you money on a variety of banking options, like loan rates or credit card fees.
negotiable orders of deposit (NOW accounts) NOW accounts pay interest on the money in your checking account.
With a NOW account, you can write as many checks as you want. You earn about the same interest on your balance as you would on a regular savings account. NOWs may be package deals, with small discounts on loans, free traveler's checks, and no annual fees for credit cards.
But, if you keep less than the required minimum balance in your account, the fees are usually higher than those on regular checking accounts.
money market deposit accounts Money market accounts are hybrids, part checking and part savings.
You earn a changing rate of interest to reflect market conditions. The rates are usually higher than those paid on NOW accounts or regular savings accounts, and may be in the same range as CD rates.
Banks may offer high initial rates to attract your business, or pay more interest on larger balances.
You must deposit a minimum amount to open an account, and fees are high if you keep less than the required amount in the account. Some accounts limit you to 3 checks per month and restrict money transfers.
money market mutual funds Mutual fund companies offer checking-writing privileges on money market accounts.
You earn market-rate interest, and rarely pay fees for writing checks on money market accounts.
The fund may require a minimum opening balance, often in the $2,000 range, and you may have to wait 14 days to write checks against deposits.
Usually , there is no limit on the number of checks you can write, but each check must be for a minimum amount, often $250 or $500.
asset management accounts Brokerage houses offer checking accounts as a way to meet all of their clients' financial needs.
With asset management accounts, you can write an unlimited number of checks and you get a comprehensive year end statement, plus the advantage of using one account for all your banking and investing.
You need a relatively high balance, often $5,000 - $25,000, to open an account and you usually pay an annual fee, plus fees for investment services.
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