If you are in the habit of occasionally writing checks before your paycheck is actually deposited into your account because you think they won’t clear for several days, you may be in for a rude awakening — and a few bounced checks. Thanks to a new law, the informal grace period between when a check is written and when it gets paid — known as the “float” — drops from two to four days to one day. In fact, your check could now clear in a matter of hours.
The Check Clearing for the 21st Century Act, or Check 21, lets banks transmit electronic images of a check rather than wait for the original paper check to make its way through the banking system. Check 21 also eliminates the return of original checks to consumers, who instead are entitled to substitute checks or reproductions of original checks.
“We’re putting more faith and trust in [today's] technology,” says T. Charles Williams Jr., a Bethesda, Maryland-based financial adviser with American Express Financial Advisors. As a result, Williams says, the check-clearing process “is going to be much faster.” You might be thinking, “Great! The checks I deposit will clear right away.” Not so. Banks don’t have to make your funds available any sooner than before.
So what can you do? Bottom line: Only write checks that you know you have the money to cover. In general, you should always keep enough in your checking account to cover at least three month’s worth of expenses. “If you know you’re going to be writing checks to the electric company and the phone company, make sure there’s at least enough in there to cover [those bills] and you’re not in a situation where you’re trying to time when you write those checks,” Williams says.
You also should have overdraft protection. Talk to your bank and see if you can link your savings account to your checking account. That way, if the funds in your checking account aren’t available in time, the bank will take the money from your savings account rather than bounce your check. Some banks also let you link your checking account to either a personal line of credit or a home equity line of credit.
The ramifications of a few bounced checks go beyond paying overdraft fees, says Raymond H. Starkes III, a general partner for the Laurel, Maryland-based Residential Home Loan Centers. “It impacts a person’s credit, and it is then going to impact their ability to borrow for mortgages,” he says.
While Check 21 may cause a few hassles in the beginning, it basically forces you to adjust your money management skills to ensure cash flow. Such attention to your finances will be beneficial in the long run.