Definition
A certified check is a type of check for which the issuing bank guarantees the availability of cash. It verifies that the account has sufficient funds to cover the amount of the check when it was written and that the signature is genuine. The bank also sets aside the funds, ensuring the check won’t bounce when it’s cashed or deposited.
Key Takeaways
- A certified check is a type of check for which the bank guarantees that enough funds exist in the account when the check is issued. This ensures that the check will not bounce when it is cashed or deposited.
- Bank or financial institution usually impose a fee for certifying checks. The check writer, or issuer, usually pays this fee.
- A certified check is a secure form of payment for parties that do not necessarily trust each other. It offers guarantee of payment to the payee and is often used in large transactions such as buying a home or car.
Importance
A certified check is an important financial instrument because it guarantees that the payer has sufficient funds in their account to cover the amount specified on the check. This assurance is provided by the bank or financial institution, which sets the funds aside and certifies the check, thereby reducing the risk of the check bouncing due to insufficient funds.
As such, certified checks are commonly used in transactions where the receiver needs immediate, guaranteed cash. They offer a safe, secure method of payment and are often required in large transactions such as purchasing a home, car, or other big-ticket items.
This guarantees security and peace of mind for all parties involved, making the transaction process smoother and more reliable.
Explanation
A certified check serves a significant purpose in financial transactions by providing security and assurance to the person receiving the payment. Typically used in large transactions or situations where the recipient needs to be certain that the funds are available, a certified check acts as a proof that the buyer’s account has enough money to cover the check’s amount.
Once issued, the bank or financial institution immediately freezes the specific amount, ensuring it will be available when the recipient, or the payee, decides to cash or deposit the check. This type of payment method is frequently used for significant transactions like buying a home, a car, or making substantial deposits.
It assures the seller that they will receive the funds promised to them and reduces the risk of the payment bouncing due to insufficient funds in the buyer’s account. In addition, using a certified check can speed up transactions because the bank has already checked and set aside funds, eliminating the need for the paycheck to clear.
Thus, it is a convenient and secure form of payment in high-value transactions.
Examples of Certified Check
Buying a Car: Suppose you decide to buy a used car from a private seller. The seller may not know you and may not be confident that a personal check from you would not bounce. In this case, you can provide a certified check. With this, the seller will be assured that the bank has already set aside the funds from your account, minimizing the risk of the check bouncing.
Down Payment on a House: When you’re purchasing a new home, the real estate company or seller may request your down payment in the form of a certified check. As substantial amount of money is usually involved in real estate transactions, a certified check ensures that the funds are available and legitimate, easing the seller’s concerns about payment.
Large Purchases & Transactions: For expensive items like art, jewelry, or even a boat, sellers might want more assurance than a personal check or cash can provide. Using a certified check in such instances can provide that level of security for both parties. Moreover, some businesses or individuals might ask for a certified check for services rendered if the sum is substantial. In general a certified check provides a level of security that the payment is guaranteed by the bank, making it a preferred choice in transactions involving significant sums.
Frequently Asked Questions about Certified Checks
What is a Certified Check?
A certified check is a type of check for which the bank verifies that sufficient funds exist in the account to cover the check and so it cannot be bounced. The bank also earmarks those funds to be paid out when the check is used.
How to get a Certified Check?
You can get a certified check by going to your bank or credit union and requesting one. You’ll need to have the exact amount of money it should be written for, as well as the name of the payee.
Are Certified Checks Safe?
Yes, certified checks are generally safe for recipients because the issuing bank guarantees the check amount and the payer cannot stop the payment. However, it is possible for fraudsters to forge certified checks.
What is the fee for a Certified Check?
The fee for certified checks will vary by institution. Many banks and credit unions will offer certified checks free of charge for their customers, but others may charge a fee of up to $15.
Can a Certified Check be canceled?
Once a certified check has been issued, it usually can’t be stopped or canceled unless it is lost, stolen, or there’s a reason to suspect fraud.
Related Entrepreneurship Terms
- Banking Institution
- Payee
- Drawer
- Guaranteed Funds
- Check Fraud
Sources for More Information
- Investopedia: This site offers a wide range of information on almost every financial topic, including certified checks.
- Bankrate: Bankrate provides clear, jargon-free advice on everything from basic bank accounts to complex derivatives.
- NerdWallet: This site offers free tools and advice that make financial decision making easy, including articles on certified checks.
- The Balance: It delivers clear, practical, and straightforward personal financial advice, including detailed explanations about certified checks.
