The Ins and Outs of Paying by CheckAdvertiser Disclosure by Lucy Lazarony
Excited about opening a checking account? You should be. Paying by check can make navigating the financial world easier and much less expensive. Just ask anyone who’s had to pay bills by money order.
Once you open a checking account, you’ll not only have a safe place to stash the cash you need for monthly expenses, but you’ll also have the convenience of writing a check to pay your bills. But it’s important to understand checks before you start using them.
What is a Check?
A check is nothing more than a document of instructions for your bank. When you write a check, you are telling your bank to transfer a specific amount of money from your checking account to another person or company.
When you pay an electricity bill, you are instructing your bank to pay a specific amount of money to your electric company.
Let’s look at an example. Let’s say you have a $50 electric bill from ABC Electric. First, you write today’s date on the line in the far right corner of the check. Next, you write “ABC Electric” on the line that begins with “Pay to the order of.”
You need to write the precise dollar amount on the check, in both numbers and in words. You write the dollar amount in numbers ($50.00) in the box next to the dollar sign. And you write the dollar amount in words, indicating any cents as a fraction over 100, on the line that ends with the word “dollars.”
To authorize the transfer of money from your checking account to ABC Electric, you need to sign the check. By providing your signature on the line in the bottom right corner of the check, you’re telling your bank that it’s OK to move money from your account.
As soon as you finish writing and signing a check, be sure to make note of the transaction in your check register.
With a checking account, money flows in from your deposits and out when you pay by check, use your debit card, make an electronic payment or make withdrawals.
Monitoring this money flow carefully is essential to your financial health. When more cash is flowing out than in, you run the risk of writing a bounced check.
Why You Should Avoid ‘Bouncing’ Checks
A check bounces when there’s not enough money in your account to pay the amount you specified. If you write a $250 check when you have $200 in your account, your check will bounce. When this happens, you’ll be hit with a hefty fee, often $25 or more.
Bounce enough checks and your bank could close your checking account. And you may have a tough time opening a checking account with another bank after this happens.
Here’s why: Most banks and credit unions report customers who have their accounts closed due to bounced checks to a company called Chex Systems. This company keeps a database of bank customers who write bounced checks and don’t pay them back. Once you are part of this database because of your bounced checks, it may be difficult for you to open a checking account with another bank or credit union.
So it’s a good idea to be a squeaky-clean checking customer and keep close tabs on your individual cash flow. Make note of every ATM withdrawal, debit card purchase, electronic payment and check payment in your check register to help you prevent overspending.
Nervous about bouncing a check by accident? You may want to sign up for overdraft protection for your checking account. Put a few hundred dollars in a savings account and have it linked to your checking account. If there’s not enough money in your checking account to pay a check, the money will be drawn from your savings account. Be sure to ask about fees when signing up for overdraft protection.
How a Check is Processed
It’s also important to understand how quickly a bank processes each kind of checking account transaction.
An ATM withdrawal gets debited from your account almost immediately. Ditto for payments made by debit card where you punch in your Personal Identification Number (PIN) at the time of purchase. Signature-based purchases that you make with a debit card take a bit longer to process. These purchases are typically deducted from your checking account in two or three days.
Processing a payment by check is a bit more complicated. Let’s take a look at the journey a check makes after you mail it to a merchant. We’ll use that $50 check written to ABC Electric as an example.
- You write a $50 check to ABC Electric and mail the check.
- ABC Electric receives the check.
- ABC Electric deposits the check into its local bank.
- ABC Electric’s bank sends the check to a regional processing center.
- The regional processing center sends the check to your bank.
- Your bank receives the check from the processing center and deducts $50 from your checking account.
Back when your actual paper check traveled from bank to bank by mail, this whole process would take a few days. But electronic processing has sped up the process considerably. Now banks can collect and return checks electronically. The days of the long “float” are over. (“Float” is the amount of time that passes from when a merchant receives your check and the moment when your bank deducts the payment from your checking account.)
Once a merchant receives your check and deposits it into a local bank, the payment process moves quickly. Thanks to electronic processing, an electronic image of your check speeds its way back to your bank. In some cases, your check payment could be deducted from your account in just 24 hours. So, in this case, if your merchant’s bank receives your check on a Tuesday, the payment could be deducted from your checking account as early as Wednesday.
Some merchants are choosing to bypass the check processing system altogether. You may send them a check, but they don’t process your payment as a check. Instead, they take the information on your check — the check number, your account number and the routing number that identifies your bank — and make a one-time electronic payment from your account. This is called an electronic fund transfer.
Some utility companies and credit card companies choose to process their customers’ checks this way; in-store merchants may do the same. With an electronic funds transfer, a payment could be deducted from the customer’s checking account the same day that a merchant receives payment.
Let’s say your check arrives to a credit card company on Tuesday. The card company processes the payment as a one-time electronic fund transfer on Tuesday and the payment amount gets deducted from your checking account the very same day.
Even though you wrote a check, you likely won’t see this transaction listed as a check on your next bank statement. Instead, you’ll see an electronic debit payment listed next to the merchant’s name.
It’s a good idea to take some time every month to carefully go over your bank statements. Make sure each transaction listed on your bank statement matches a transaction listed in your check register. If there’s an error, be sure to contact your bank.
Paying Your Taxes By Check
Checks can be particularly helpful when making large, one-time payments, like your federal taxes. If you choose to make your tax payment by mail using a check rather than an electronic payment, you’ll make the check payable to the U.S. Treasury and mail it to the address listed on the notice you received or the instructions that accompanied your bill.
Per the Internal Revenue Service (IRS), you don’t want to staple or paper clip your payment to the return documents. The IRS also requests you include all the essential details on your check so it gets put toward the correct bill. This includes things like your name, address, phone number, Social Security number (if you’re filing a joint return, you’ll just need the Social Security number that is listed first), employer identification number (if applicable), tax period and related tax form or notice number.
Understanding how to use and manage your checking account responsibly is a great first step to establishing good finances. A checking account is an important building block in gaining access to other services such as credit cards, loans and savings accounts.