In today’s technologically advanced world, electronic payments have become the norm. Instead of writing a check – which is basically an IOU that the merchant can take to your bank and collect on – a debit card, credit card, or even a virtual payment like Apple or Google Pay is a standard payment option. Some merchants even allow you to simply tap your credit card onto a terminal sensor and be on your way.
When it comes to big purchases and important transactions, however, electronic methods of payment aren’t always accepted, such as with the purchase of a vehicle, a home, or making a large deposit into an investment account. Writing a regular check is somewhat of an obsolete concept now as well; risk has become a real issue to the point where most merchants won’t even accept a check anymore. A certified check, however, reduces risk to both the check writer and seller in a large transaction and is considered as good as cash.
At some point in your life, you will probably enter into a transaction that’s large enough to require some sort of guaranteed funds, and while direct wire transfers are always an option, a certified check is an excellent—and often more convenient—way to provide that to the seller.
Lets take a closer look at how these checks work and how they compare to other financial products.
On this page:
- What is a Certified Check?
- Where Can You Get a Certified Check?
- Why Do People Use Certified Checks?
- Managing the Risks of Certified Checks
- Certified Check vs. Cashier’s Check vs. Money Order
What is a Certified Check?
With a regular personal check, the seller deposits the check in their own bank account. Their bank takes the check to your bank and asks for the funds the check is drawn upon. If the funds aren’t in your checking account, the bank can either overdraw the account in order to pay the check or refuse the check entirely, leaving the seller without their money.
In the case of a certified check, the bank guarantees not only that the signature on the check is genuine and it’s signed by the proper account holder, but also that the funds are available to cover the check.
When you purchase a certified check, the bank certifies and holds the funds necessary to cover the check in an escrow account to ensure they cannot be spent elsewhere. When the check is presented, those funds must be made available immediately—unlike other types of checks, which can take up to 10 days to become available.
Where Can You Get a Certified Check?
Most banks and credit unions offer some form of a certified check in which the funds are guaranteed. Some banks will only allow you to purchase one if you already have an account with them; others will simply charge a higher fee.
Even with banks that offer them to customers, there is usually a fee associated with purchasing a certified check; while some charge a flat fee, others charge a percentage of the check amount. As a result, the fees can range from as little as $5 to as much as $75 depending on the individual bank or your account level with them.
Why Do People Use Certified Checks?
When it comes to transactions that need guarantees, a certified check is an easy way to accomplish that. It is seen as a more official check as compared to a personal check because they guarantee payment.
The cash flow is predictable; since the bank must honor the check immediately upon presentation, a seller knows that the money will be there, leading to better planning. For buyers, it means that the items being purchased can be released to them immediately, as well, instead of waiting for personal checks to clear or pending electronic transactions to show in their bank accounts as paid.
Certified checks also remove any risk that the payment will “bounce” or be returned for non-payment. Sometimes people forget they’ve written checks or forget to account for them when viewing their balance. It’s easy to continue to spend before a personal check clears the account, thereby leading to insufficient funds when the check arrives back at the bank for payment.
Managing the Risks of Certified Checks
While certified checks come with almost none of the risk of a personal check for buyers and sellers alike, no financial transaction is 100 percent risk or error-free. There is still a small risk of fraud or errors; with today’s technology, almost anything can be counterfeited. While passing a bad check is against the law, even as the recipient you could be held financially liable for a fraudulent check—even if you didn’t know it was a fake. When you submit a check for payment, if the check is a fraud, you could be held responsible for the entire amount of the check, regardless of the amount.
>> Read More: How to Tell If a Check is Fake
It’s ultimately your job, if you’re the buyer, to make sure that the check is correct and free of errors. If you’re the recipient, you should be careful when accepting any check, including a certified one. The Federal Trade Commission, or FTC, offers some tips on how to recognize a fraudulent check.
- Carefully inspect the check for errors in printing or just looking “wrong.” The FTC says that if something doesn’t look right, it probably isn’t.
- Read the check out loud; it will help you catch typos, which could signal a counterfeit check.
- Compare the issuing bank’s address and phone number on the check with what it stated on the bank’s website and make sure they match.
- To be extra safe, call the bank listed on the check and ask them to verify its authenticity. They can verify it with the name of the person on the check or the check’s number; banks keep copies of all transactions and can tell you if that check was truly issued there.
Protect yourself by ensuring that you don’t take out cash from an ATM, use your debit card, or otherwise withdraw funds from that account until the bank can confirm that the check funds have been placed in your account.
Certified Check vs. Cashier’s Check vs. Money Order
A cashier’s check is similar to a certified check in that it is generally seen as more secure than a personal check, but it is slightly different. Consumers can purchase cashier’s check from a bank and use it as needed. The check is drawn against the bank’s funds, not your own. With a certified check, the bank holds your money until the check is cashed, and your money is paid out.
With a cashier’s check, you use your own money to buy the check and when it is cashed, the bank pays its own money out. While both types of checks are generally considered safe, a cashier’s check may be a little more secure due to the fact that it is paid out from the bank’s funds as opposed to your own.
Certified checks are more closely related to money orders, and work almost exactly the same way. With a money order, a consumer can purchase a certificate which can then be used to purchase something. When the recipient of the money order cashes the certificate, they are then paid the funds.
The main difference between a money order and a certified check is that money orders are typically for lower amounts of money than certified checks and are more widely available. Consumers can purchase money orders from places like supermarkets and retail locations like Walmart whereas only financial institutions, like banks, issue certified checks. If you are making a large purchase of $1,000 or more, a certified check is probably your best bet. If not, you should consider a money order to save on fees.
Certified checks are common in business, real estate, and other industries when guaranteed sufficient funds are required. Understanding how they work—and what to do if you need to use one—is just another part of being financially savvy.