What Kind of Checks Are There and When Should You Use Them?

Checks remain a recognized method for transferring funds, serving both individuals and businesses in managing their financial transactions. They provide a physical record of payment, offering a traditional alternative to digital transfers. Understanding the various types of checks and their appropriate uses can help navigate different payment scenarios.

Standard Checks

Personal checks are physical documents that instruct a bank to pay a specified amount from an individual’s checking account to a designated payee. Business checks operate similarly but draw funds from a company’s checking account.

Standard checks include several important components:
The date
The payee’s name
The payment amount in both numerical and written form
A memo line for notes
The account holder’s signature
The bank’s routing number and the account holder’s account number (printed below the signature line)

When a check is written, the payer is essentially promising that sufficient funds are available in their account to cover the amount. The payee then deposits or cashes the check, initiating a process where their bank requests the funds from the payer’s bank. This transfer of funds typically takes a few business days to complete.

A “bounced check” occurs if the payer’s account lacks sufficient funds. If a check bounces, the payer’s bank returns it unpaid, resulting in non-sufficient funds (NSF) fees, typically $25 to $35. The payee’s bank may also charge a fee. This risk highlights why standard checks are used when there is trust between parties.

Bank-Backed Checks

Bank-backed checks offer a higher level of security compared to standard personal or business checks, as the availability of funds is guaranteed by a financial institution. These checks are particularly useful for large transactions where the recipient requires assurance of payment. The two primary types of bank-backed checks are cashier’s checks and certified checks.

Cashier’s Checks

A cashier’s check is issued directly by a bank and drawn on the bank’s own funds, not the customer’s account. The bank withdraws the amount from the customer’s account and signs the check, guaranteeing payment. These checks are commonly used for significant purchases like real estate or vehicles, where the recipient wants to eliminate the risk of a bounced check. Obtaining one typically requires visiting a bank branch, providing identification, the exact payment amount, and the payee’s name. Banks usually charge a fee, often $10 to $15.

Certified Checks

A certified check also guarantees funds but is a personal check drawn from the payer’s account. The bank verifies sufficient funds and “earmarks” the amount, making it unavailable for other use. The bank then stamps the check as “certified” and a representative signs it, confirming fund availability and signature authenticity. Certified checks are suitable when a recipient needs assurance of funds, but payment is from the payer’s account. Fees range from $15 to $20, and they are typically obtained in person at a bank branch.

Specialized Payment Instruments

Beyond standard and bank-backed checks, other payment instruments serve specific financial purposes. These instruments cater to different needs, often when traditional checking accounts are not involved.

Money Orders

Money orders provide a secure way to send money, particularly for individuals who may not have a traditional bank account. They are prepaid instruments, meaning the sender pays the full amount upfront, plus a small fee, ensuring the funds are guaranteed. Money orders can be purchased at various locations, including post offices, convenience stores, and some financial institutions, typically with a maximum limit of $1,000. They are often used for small, secure payments where a physical, guaranteed payment is needed without using a personal check.

Government and Payroll Checks

Government checks are issued by federal, state, or local government entities for various disbursements, such as tax refunds or Social Security benefits. These checks are considered highly reliable due to the issuer. Payroll checks are issued by employers to employees for wages or salaries. While resembling standard business checks, their purpose is specifically for employee compensation.

Counter Checks

Counter checks are temporary checks provided by a bank, often when a customer opens a new account or runs out of regular checks. They contain the bank’s routing number and account number but may lack personalized details like the customer’s name and address. Obtained directly from a bank teller, they can be used for immediate payments or withdrawals. However, due to their temporary nature and lack of personalization, some merchants or individuals may be hesitant to accept them.

Digital Check Equivalents and Important Considerations

The financial landscape has evolved to include digital alternatives that serve a similar function to traditional paper checks, offering convenience and speed.

Electronic Checks (e-checks)

Electronic checks, often referred to as e-checks, are digital versions of paper checks. These payments are processed through the Automated Clearing House (ACH) network, allowing for direct bank-to-bank transfers without a physical paper document. E-checks typically involve a one-time transfer from the payer’s bank account to the payee’s, authorized by providing banking details.

ACH Payments

ACH payments encompass a broader range of electronic transfers through the ACH network, including direct deposits and recurring payments, not just digital checks. While e-checks are a type of ACH payment, ACH transactions can also facilitate other transfers like bill payments or payroll direct deposits. These digital methods offer faster processing times, settling within one to three business days, and are more cost-effective than traditional paper checks.

Stale Checks

Important considerations for all types of checks include their validity and handling. A “stale check” is a check not cashed or deposited within a reasonable timeframe, typically six months (180 days) from its issue date. While banks are not obligated to honor stale checks, some may still process them. If a check is stale, contact the issuer for a replacement to avoid potential issues.

Post-Dated Checks

A “post-dated check” is a check written with a future date. This is done so the payee will not attempt to deposit or cash it until the specified future date, perhaps to align with the payer’s expected availability of funds. Banks can sometimes process post-dated checks before their stated date. Therefore, relying on the post-date to prevent early cashing carries a risk.