How Check Float Works
Consider what happens when you write a check and drop it in the mail. The payee (your mortgage company, for example) credits your account. They note that you have paid on time, as agreed. Then, they take the check to their bank. Their bank sends the check to your bank to collect on it, and the money comes out of your checking account.
The time between your payment to the mortgage company and the deduction from your account is called the float.
In the example above, the float could be a week or longer. First, you wait for the mail to deliver your payment to the mortgage company. Next, the mortgage company takes time to get the check to their bank (this could be fast or slow, depending on their processes - such as lockboxes and remote check capture). Finally, it takes time for the mortgage company’s bank to get the check processed by your bank.
Abusing Check Float
When you write the check (or even when they get your check) you might not have money in your checking account to cover the payment. Perhaps you know that it will take some time for the payment to be processed, and you know that your paycheck will be deposited in the meantime. In such a case, you’re taking advantage of the float.
Technically, you’re not supposed to write a check if you don’t have the funds to cover it. People have been breaking this rule for years. However, it’s getting easier to get caught.
Speeding Things Up
In 2004, Congress passed the Check Clearing for the 21st Century Act (known as Check 21). This Act allows banks to use electronic versions of checks to operate more efficiently. They don’t send the paper checks to each other anymore – they use a substitute check. Substitute checks are images of your plain old paper check, but they’re considered just as valuable as the genuine article.
On the next page, see how this process can sting you if you try to play the float.