THE 21ST CENTURY ACT – WHAT DOES IT MEAN TO YOU

Stillwater – Have you heard about the Check Clearing for the 21^st Century Act (popularly known as Check 21)? This law went into effect on October 28, 2004 and affects how checks are processed and returned to check-writers. Instead of physically moving paper checks around, this law allows financial institutions to process more checks electronically. If the financial institution receiving the funds requires a paper check (or a consumer requests a paper check), “substitute checks” can be provided, instead. These substitute checks are created from electronic images of the original paper checks.

It is important to understand how this new law could affect you. First, while check processing times already have been speeded up due to earlier improvements, Check 21 improvements may mean money is deducted from your financial account even faster. Those consumers who previously relied on “float” – writing checks and later depositing funds to cover them – may find themselves with costly overdraft and other charges for overdrawn accounts.

One of the best ways to avoid this problem is simply not to write a check until you know the money is there in your account to cover it. Keeping your checkbook register up to date – noting all check, ATM, debit, and automatic transactions, as well as banking fees – and reconciling your account statement with your checkbook register will be even more important to avoid overdrafts and additional charges. Consumers who use online banking may be able to keep track of their accounts on a more frequent basis. Keeping track of your account transactions and balances more frequently also can help you spot fraudulent activity.

Another possibility is to look into your financial institution’s overdraft protection. However, be sure you understand how the overdraft protection works and the various fees and costs incurred if you take advantage of it. In some cases there is a flat fee, while in other situations the overdraft or “bounce” protection becomes a loan, with interest charges that can be quite high.

Second, this law does not specifically address how quickly deposited funds are made available to the consumer. Check with your financial institution regarding how long it will be after you make a deposit before the funds are available to you.

Third, Check 21 may affect the information you receive from your financial institution. Your account agreement still governs whether cancelled checks are returned to you or not. However, if you have been receiving cancelled checks with your account statements, your financial institution may notify you that you will begin receiving “substitute checks” or a combination of cancelled checks and substitute checks. If you have been receiving image statements (pictures of several checks on a page), you may be notified that you will begin getting pictures of substitute checks or pictures of both cancelled checks and substitute checks.

It is important to remember that these substitute checks are the legal equivalent of cancelled checks and can be used as proofs of payment for IRS and other purposes.

Many consumers are not aware of this new law. However, some of the resulting changes make it even more important to carefully manage your checking account to avoid expensive mistakes.

Source: Federal Reserve Board, “Consumer Guide to Check 21 and Substitute Checks,” October 28, 2004. Retrieved November 2, 2004 from http://www.federalreserve.gov/

Prepared by: Martha L. Albright

Cimarron County Extension

Educator and

Joyce E. Jones, Ph.D.

Personal Finance Specialist

Cooperative Extension Service

333 HES, CES-FCS, OSU

Stillwater, OK 74078-6111

(405) 744-6282

joyce.jones@okstate.edu