Banks hold checks for several reasons, all based on the need to ensure that the check will be honored by the bank on which it was drawn. This wait, sometimes called the "clearing period," prevents the funds from being used by the customer right away. When a person deposits a check into his or her account, the bank must then present that check to the bank on which it was issued. While most of this is done electronically in many places, banks still hold checks to test for fraud or insufficient funds on the part of the check writer.
Checks in the US and Elsewhere
While the laws in other countries vary, few countries rely as heavily on paper checks as the United States. In Europe, for instance, most payments are made electronically, with a payer transferring funds directly into the account of the payee. This is similar to what happens when a US bank customer pays using the online bill pay service of his or her bank. In most cases, an electronic funds transfer (ETF) is not subject to the same holds that checks are.
In the United States, banks classify checks as local or non-local. Banks hold checks drawn on local banks for a shorter period of time — in most cases, just one day. Checks that are deemed non-local, which means they come from a bank that operates outside of the local bank's check-processing region, generally take longer. It is important to note that the clearing period may be affected by holidays, weekends, or any time the bank is closed. It also is essential to understand that a check that has cleared could later be presented for insufficient funds or fraud, and the amount deducted from the depositor's account.
Bank Policies for Holding Checks
Although there are usually laws that limit the maximum amount of time banks hold checks, minimums are typically determined by each bank. Customers should ask about the policies specific to the bank, and the bank should notify them if any of those policies change. It also is important to understand a bank's guidelines on when deposits must be made. Though a bank may be open later in the afternoon, it may require that all deposits be made by 4 p.m. to be credited that day. Anything deposited later than that — whether through a teller or an ATM — will be credited the next day.
While many policies apply broadly, banks may hold checks on accounts of certain customers. Those who frequently have overdrafts, or who deposit a number of checks that are returned for nonpayment, may find their banks hold checks for a longer time than normal. A new bank account may also be subject to a longer hold since the customer hasn't had time to build up a solid banking history. A check that has been previously returned for payment and is being resubmitted to the bank may also be subject to a longer hold to confirm that the money is available. Checks over a certain amount also may be delayed for the same reasons.
Availability of Funds from Held Checks
When banks hold checks, it means those checks have not cleared their accounts, and the funds are not available for withdrawal. If the depositor is not careful, he or she can overdraw the account because the money has not yet officially been deposited. It is important for customers to understand their banks' specific policies regarding checks that are being held, and to ask about any unique circumstances in which funds may be accessible more quickly.
Checks that Are Not Held
Not all checks are subject to a clearing period. Checks written by the US Treasury — from IRS tax refunds to Social Security payments — typically clear right away. Some banks will immediately clear a check written by one of their customers and deposited into the account of another customer. Many larger company paychecks are actually electronic funds transfers and clear immediately. Some banks will also allow a customer access to a portion of the check while the rest waits to clear.