Checks and Balances

Money: Understanding how the new 'Check 21' will affect you and your bank

Your check is no longer in the mail.

For time immortal, check writers have taken advantage of what’s known as the “float.” The float refers to the several days that a bank took to clear paper checks written by their account holders. In essence, you could write a check today, even if you didn’t have enough money in your account, so long as you deposited enough funds within a day or two.

Well, folks, those days are over.

Beginning this month, banks are allowed to use a new and faster process for clearing the paper checks written by their account holders. This new process stands to save the banking industry as much as $3 billion a year, or more. It’s clearly a good thing for banks but this change has the potential to trip up many unknowing check-writing consumers.

The federal Check Clearing for the 21st Century Act, or Check 21, allows banks to change how they process and clear paper checks. Up until these new rules, banks had to manually sort many of the paper checks deposited with them and transport these paper checks by truck, train or airplane to the various paying banks for processing.

The transporting of paper checks is a big deal — each day banks transport an estimated 101 million checks weighing 163 tons.


For more information about
Check 21 check out Consumers Union –
www.consumersunion.org/finance/ckclear1002.htm.

But under Check 21, when a bank receives a paper check, it is allowed to create an electronic version called a “substitute check,” which is then sent electronically to the paying bank. Upon receipt of the electronic “substitute check,” the paying bank will immediately send the funds and debit the check writer’s account. Banks will also not be required to return the original paper checks to consumers and they are likely to destroy these.

Advocates for Check 21 say that this new process is more reliable and secure. They also say that the faster check clearing will allow banks to detect fraudulent checks and catch the bad guys who write these checks sooner.

While that may be true, it also means that consumers need to be sure their bank account has enough money to cover checks on the day they were written. Unfortunately, most consumers are not aware that the rules have changed.

As a result, consumer advocates say that faster clearing of funds to cover checks will increase the number of “bounced checks” and the fees for these to consumers could rise by as much 20 percent.

Consumer advocates say that the initial implementation period through the end of December could be the most difficult adjustment time for check writers and their banks as they become acclimated to the new Check 21 clearing process. Consumers who write checks during this time are advised to consider the following:

  • Write only what you can cover.
  • Assume that as soon as you write and give your check as payment, that the funds will be withdrawn from your account. Consumers should avoid writing “pay-day checks” — checks for expenses several days before payday — as these checks are more likely to clear before the paycheck is deposited in the account.

  • Check your statement more often.
  • As banks adjust during the transition from sending and receiving paper checks to electronic ones, their mistakes could involve paying an incorrect amount or paying the same check twice.

  • Request the new “substitute checks.”
  • Only 36 percent of checking-account holders receive paper checks with their monthly statements. But if you do, ask if your bank is going to stop providing your original cancelled checks. However, it’s important to ask if there are any additional fees for your bank to provide the substitute checks to you.

  • Use direct deposit.
  • Although Check 21 will not speed up deposits, paychecks, pensions, Social Security and other forms of income should be set up for direct deposit into your banking account for faster and more secure payment.

  • Get an overdraft credit line.
  • If you routinely run your checking account down to near zero, you should look into adding an overdraft credit line or linking your checking account to your other savings at the same bank. You will need to inquire about any additional fees this feature will involve.

  • Use credit cards for larger purchases.
  • It’s always been a good idea to use a credit card as the form of payment for larger purchases — now credit cards have even more advantages over checks. For example, it will be more difficult to stop payment on a check when you have a dispute with a vendor. Credit cards provide protections allowing consumers to dispute incorrect charge amounts before paying, additional warranty protections and rewards programs. During your bank’s Check 21 transition period, it might be advisable to use your credit card more often.