What are checks, and how do they work? - I

You reach for your wallet and it’s not there. Panic gives way to despair when you realize that your wallet is gone and so is your cash. Chances are you’ll never see the cash again. 

The consequences are not nearly as serious if you lose your checkbook. All you do in that case is close your checking account and open a new one. After that, your lost or stolen checks are worthless to anyone who might try to use them. Because they are safe and convenient, checks have become a popular method of paying for things or transferring money. 

But what exactly is a check? In simple terms, a check is a written set of instructions to your bank. When you write a check, you are instructing your bank to transfer a specific amount of money from your checking account to another person or an organization. 

You can even write a check to convert some of the money on deposit in your checking account into cash. When you fill in the blank spaces on one of your checks, you are telling your bank three things: 

1) how much of your money you want to transfer, 

2) when you want to transfer it, and 

3) to whom you want it to go. 

You authorize the transfer by signing the check. So, if your favorite aunt sends you a $50 check for your birthday, she’s actually telling her bank to transfer $50 from her account to you. 

But when you go to cash her check or deposit it in your account, how does your bank know if your aunt actually has enough money in her account to cover the check? The answer to this question isn’t what it used to be.