Sometimes you open your bank statement and you get a nasty shock. Not only has the cheque you wrote for the last utility bill bounced, but your bank has charged you for the privilege. And it's not the first time it's happened, so your previously spotless credit rating could be in danger. When cheques bounce it doesn't always mean that someone has acted in bad faith. Instead, a bounced cheque may be caused by the vagaries of the cheque clearing system.
How Cheque Clearing Works
Cheque clearing works like this. A cheque is paid into a bank account. That bank contacts the issuing bank to ask them to honour the cheque. If the bank says there are enough funds to cover the cheque, the cheque clears. It there are insufficient funds, the cheque bounces. This is all done by computer.
Consider this example. Mr Smith writes a cheque to Miss Jones, who pays it into her bank account immediately. Ms Jones assumes that the money is now in her account and writes a cheque to pay her utility bill. Unknown to Ms Jones, Mr Smith does not have enough money in his account to cover the amount of the cheque he has written. When Ms Jones' bank tries to get the money from Mr Smith's bank the cheque is refused. Mr Smith's cheque bounces and so does Ms Jones'.
Cheques can take several working days to clear. The clearing period can be anywhere between three and seven working days. Factors that affect cheque clearing include:
1. The day of the week on which the cheque is paid in. A cheque paid in on a traditional non-banking day, such as a Saturday may take longer to clear than a cheque that is paid in on a weekday. 2. The bank that the cheque is paid into. Cheques usually clear quickest when they are drawn on the same bank they are being paid into. Some building societies also take longer to clear cheques 3. Whether the cheques are in the same currency.
Clearing Foreign Currency Cheques
Cheques that are drawn on a foreign bank may take even longer to clear. Some banks will treat a cheque in, for example, US dollars, like a regular cheque. They will assume the cheque will clear and will credit the right amount to your bank account, less any foreign transaction fees.
Other banks are more wary and will wait for the whole clearing process to complete before crediting your bank account. This could take up to six weeks as cheques effectively have to clear two banking systems.
Avoiding Charges For Bounced Cheques
The best way to avoid bouncing a cheque is to be aware of what is happening in your bank account. Check account balances and be aware of the dates on which standing orders and direct debits are going out. If there are payments waiting to go out, you may have less money available than you think. When in doubt, check bank statements or ring or email your bank for an update. Joe Kenny writes for CardGuide.co.uk, with the latest 0% balance transfers, and more info in the personal bank account article.
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