SAN DIEGO — Your rich Aunt Tillie in Ohio finally sends you money for a new car. You can't wait 10 days for the check to clear. What should you do?
Tom Jr. just arrived at school on the East Coast--broke. You need to send him money. Fast.
Only one thing is certain--a personal check will never clear fast enough. The car deal of the century could pass you by and Tom Jr. could be evicted from the dorm, but banks insist on holding checks in a limbo called the float period until they are convinced the funds exist to pay the amount. That lag time between depositing the money and actually being able to spend it can be extremely inconvenient for the customer. How can you avoid it? You need to think and talk like a banker and perhaps pursue some alternatives to personal checks.
In bankers' parlance, a check or a negotiated order of withdrawal from a NOW account (an interest-bearing checking account) at a savings and loan association is an "item"; a thrift institution is a savings bank, savings and loan association or credit union, and is often simply referred as a thrift. After an item is deposited, it travels a circuitous route that varies depending on whether it's from a bank or a savings and loan.
In general, the day an item from Great American First Savings Bank is deposited at a Home Federal Savings and Loan Assn. branch it travels to Home Federal's central processing center to be microcoded. That night it is sorted and grouped according to financial institution and sent to the nearest Federal Reserve. The Federal Reserve debits the account and the next morning sends the item to the Great American central processing center. If for some reason the item can't be paid--because the account is closed or because of insufficient funds--Great American will return it to the Federal Reserve, which will send it back to Home Federal. San Diego's nearest Federal Reserve branch is in Los Angeles, so even local items must travel north unless they are drawn and deposited at the same financial institution.
It's a complicated process in which billions of pieces of paper travel daily around the country. A bank or thrift doesn't know whether funds exist to cover a deposit for four or more working days. The boondoggle in the system is the Federal Reserve's antiquated system of returning the items that can't be paid, said one state banking official. To protect themselves against check kiting--or writing a bad check and making up the shortage temporarily by depositing a check from another bank, which also is bad--financial institutions began holding checks. Problems arose, said Mark Sandstrom, senior executive vice president at Great American, when some banks and thrifts began holding checks for inordinate lengths of time.
State legislation passed in 1983 instructed the state regulatory agencies of banks, savings and loan associations and credit unions to write regulations that would limit the amount of time items could be held. The legislation, authored by Assembly Speaker Willie Brown, also stipulated that financial institutions be required to disclose their item holding policies and that interest must be paid from the time of deposit regardless of the hold period.
The hold periods instituted by banks and thrifts are now generally one day for checks of $100 or less, U.S. Treasury checks or State of California checks, three or four days for California checks, 10 days for out-of-state checks. Many restrictions are involved; the limits do not apply to items over $2,500 or to accounts less than 60 days old or to accounts that have a history of problems. The situation gets stickier because the limits only apply to state chartered banks, savings and loan associations and credit unions--not federally chartered ones.
Because of the convoluted item-clearing process, most banks and thrifts recommend that customers use safer, guaranteed methods of moving money quickly--like wires, cashier's checks or money orders.
Wiring is the fastest, safest method of transferring money, say bank officials. The funds are transferred from the financial institution electronically through the Federal Reserve. No paper is involved; one account at the Federal Reserve is debited and another is credited without anyone ever setting eyes on the cash. Typically, you can withdraw money from the account the same day it is wired without any float or hold time. The major drawback is the cost. Banks typically charge between $10 and $15 for the service so it's not economical to wire small amounts of money. But when time is crucial, the cost may seem insignificant. Banks and thrifts require identification and your account number to wire money just as they do when cashing a check.