Don't Let 'Check 21' Take A Bite Out Of Your Finances
By Philip A. Dyer
Spring 2005
Do you find that you frequently have "too much month for the money?" Do you often find yourself juggling accounts and balances to make ends meet?
You may want to start being more careful.
Let's say you write a $25 check to a local merchant on the 29th of the month - even though you don't have quite enough money in the account to cover the check - and count on the three-to-five-day check processing time, or the "float," to cover you until payday on the 30th.
Sound familiar? That is how millions of Americans have handled "too much month for the money" for decades.
Here's a scenario that may not sound so familiar: To your shock and horror, the check bounces. Returned check fees and penalties from the merchant and the bank might add up to $45, plus a potential black mark on your credit report.
What happened? Welcome to the brave new world of "Check 21."
This new system, introduced in October 2004, essentially eliminates the "float" by providing merchants and banks "real time" debiting of consumers' checking accounts, similar to a bank debit card. While financial institutions hail the implementation of Check 21 as a much-needed step in the march towards a paperless society, many consumers have been caught unawares by the changes and are paying dearly for it.
In addition to real-time debiting, consumers should be aware of two other major impacts of the Check 21 law:
- Deposits may not be credited with the same speed as debits are processed. Checks deposited into an account - particularly out-of-state checks - may still take three to five business days (or more) to clear, while checks written against your account will clear much faster.
- Most banks will no longer return cancelled checks; they will scan the checks into a document imaging system and then destroy the originals. Since many creditors, including the Internal Revenue Service, demand a cancelled check as proof of payment, this is a problem! It may be more difficult for consumers to dispute fraudulent activity in their account.
What should you do to protect yourself from fraud and avoid unnecessary and costly bounced checks and overdraft fees?
The Consumer's Union recommends several steps to help protect your limited rights under Check 21, including:
- Ask for a "recredit" in writing. If you have a problem with your account, such as a check paid twice or paid for the wrong amount, immediately issue a written request for a "recredit" or return of funds to your account.
- Ask for a substitute check. To qualify for the recredit, you must have a substitute check. Therefore, make sure you request substitute checks from your bank. If they charge you too much for the service, seek another bank.
Beyond these items, however, you may need to put some additional protections in place and change the way you bank. Consider some immediate steps:
Direct deposit. Service members are required to use direct deposit, but many spouses with part-time or seasonal employment still elect to receive a physical paycheck, which must be deposited. This is asking for trouble, since there can be a significant delay in deposits being credited. If your employer offers direct deposit, make sure you take advantage of it.
Overdraft protection. This has always been a good idea and a sound part of financial planning, but Check 21 makes it critical. Make sure you set up overdraft protection, either through a separate credit line or by linking to a savings account or money market account, for any account you write checks on. Ideally, you should have at least enough protection to cover one month's worth of bills.
Bill paying patterns. Do you consistently find your finances squeezed at a particular time each month? Map out your regular payments and, if you have a big cluster at the beginning of the month or mid-month that strains your checkbook, contact your vendors to discuss alternate payment dates. Moving a payment date to the 7th or 21st of the month from the 1st, 15th or 30th can help smooth out monthly cash flow.
Consider moving away from paper checks. Since Check 21 has nullified the top benefit of using paper checks - the proof of a cancelled check - consider moving to online banking, automatic bill pay and debit cards. Although the technology can be a bit daunting at first and some concerns remain about cyber security, online banking is the wave of the future.
Check 21 is a dramatic change in bank operations, so be aware, be prepared and don't get ambushed by an unexpected bounced check!
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© 2005, Military Officers Association of America (MOAA). Former Army captain Phil Dyer is a Certified Financial Planner and Deputy Director of Financial Planning at MOAA.
