A check is a written, dated, and signed document directing a bank to pay a specified amount to the bearer. The person or entity that writes the check is known as the payor or drawer, while the recipient is the payee. The bank where the payor holds an account is referred to as the drawee.
Key Insights
- A check initiates the bank to transfer funds from the payor’s account to the payee’s account.
- Common check features include the date, payee line, check amount, payor’s signature, and a memo line.
- Check types range from certified checks, cashier’s checks, to payroll checks.
- Some countries, like Canada and England, spell it as “cheque.”
The Mechanism of Checks
A check essentially guarantees a certain amount of money by directing the bank to transfer funds from the payor’s account to the payee. This helps parties transact without physical currency, as checks act as written guarantees substituting for cash of the same value.
Checks generally draw from a checking account, but funds can also be transferred from savings or other types of accounts. Used for bill payments, gifts, or money transfers between individuals and entities, checks offer a more secure method compared to cash, especially for larger sums. Alternatives that function similarly in representing value without physical currency include debit and credit cards, money orders, wire transfers, and online banking.
History of Checks
Checks date back to ancient times, with forms used even by the Romans. The 20th century saw checks becoming widespread, particularly with the advent of automated check processing in the 1950s and check cards in the 1960s, which later evolved into modern debit cards. Despite the rise of electronic payment methods, checks continue to be used occasionally.
Fundamental Features of a Check
While checks might look different, they share key attributes:
- Date: Located in the top right corner.
- Payee’s Name: Center of the check under “Pay to the Order Of.”
- Dollar Amount: Box next to the payee’s name.
- Written Amount: Line below the payee’s name.
- Signature: Bottom right corner, required for validation.
The memo line (bottom left) may detail a reference or account number or specify the purpose behind the check. Along the bottom edge lie key coded numbers: the bank’s routing number, the payor’s account number, and the check number. In countries like Canada, the routing number is replaced with an institution code and branch number.
Image by Sabrina Jiang
The back typically features an endorsement line for the payee’s signature when cashing or depositing the check.
Types of Checks
Certified Check
A certified check guarantees funds by verifying enough balance in the drawer’s account. To certify a check, it needs verification from the issuing bank.
Cashier’s Check
A cashier’s check is guaranteed by the bank itself rather than the individual, often used for large, critical transactions like purchasing cars or homes.
Payroll Check
Payroll checks are issued by employers to compensate employees. While increasingly replaced by direct deposits, they still see use occasionally.
Bounced Checks
A check bounces when the written amount exceeds the available balance in the account. This non-negotiable check incurs penalty fees. Sometimes, banks offer a grace period for funds to be deposited to avoid penalties.
Do Banks Forgive Bounced Checks?
Banks have varied policies, often charging fees for bounced checks. Grace periods might be provided to deposit funds and avoid penalties.
Do Cashier’s Checks Clear Immediately?
Generally, cashier’s checks clear the next business day. However, for amounts above a set threshold (e.g., $5,252), a hold might be placed depending on the bank’s policy.
Distinguishing Certified and Cashier’s Checks
Certified and cashier’s checks are secure forms. Certified checks are backed by personal accounts, while cashier’s checks use the bank’s account balances and cashier endorsement. Both types offer high transaction safety.
Conclusion
Checks, whether personal, certified, or cashier’s, remain a valuable financial instrument ensuring secure payments and fund transfers. Understanding how to properly utilize them can provide practical benefits, hence mastering check usage is worthwhile.
Related Terms: debit card, credit card, wire transfer, currency, account number, routing number.
References
- Cornell University, Legal Information Institute. “Payor”.
- Federal Reserve Bank of New York. “Historical Echoes: Cash or Credit? Payments and Finance in Ancient Rome”.
- Federal Reserve Bank of Atlanta. “Economic Review: The Evolution of the Check as a Means of Payment: A Historical Survey”, Pages 19-20.
- Oregon State University. “Information Regarding Personal Checks”.
- Rare Book Buyer. “Newly Discovered Oldest Surviving American Checkbook.”
- Consumer Financial Protection Bureau. “I Deposited a USPS Money Order, Cashier’s Check, Certified Check, or Teller’s Check. When Can I Access This Money?”
- Office of the Comptroller of the Currency. “Avoiding Cashier’s Check Fraud”.
- Consumer.gov. “Your Paycheck”.
- FDIC. “Checking Accounts”.
- The Huntington National Bank. “24-Hour Grace”.
- Experian. “How You Can Recover From a Bounced Check”.
- Office of the Comptroller of the Currency. “The bank placed a hold on a cashier’s check that later turned out to be fraudulent. Aren’t cashier’s checks supposed to be honored immediately?”
