Consumers who rely on the float period (the lag time between when a check is deposited and when the funds clear) to get by every month are soon going to find themselves out of luck.
Starting Thursday, a federal law called Check Clearing for the 21st Century Act or Check 21, will allow banks to process checks without any lag time.
Check 21 was originally proposed after Sept. 11, 2001, when physical copies of checks could not be delivered to banks because air traffic was grounded.
Similar to an airline using an e-ticket as opposed to the standard paper ticket for your receipt, your checking account will now function the same way. Instead of relying on the paper receipt of a check, a bank will now be allowed to convert the check into a digital image and process it electronically though its system.
Once the new systems are in place, checks that used to take a day or more to clear could go through in less than 24 hours. Here are the basics on Check 21 and how you can avoid getting burned by the bounce:
What Is Check 21 Going to Cost You?
With Check 21, if there are insufficient funds in an account at the time a check is written, your check will likely bounce and you will be charged an overdraft fee of $20 to $35 per check. In fact, Check 21 could cost consumers more than $170 million in fees every month or more than $2 billion a year, according to Consumers Union.
End of the Paper Trail
Check writers who previously received their original canceled checks in the mail will lose this benefit, as banks are no longer required to return or preserve them.
However, if you require a paper copy, you can request a "substitute check," which is generated from the electronic image of the check and the payment information.
A substitute check will contain the statement: This is a legal copy of your check. You can use it the same way you would use the original check.
It is considered legal proof that a payment has been made.
Be aware -- you may be assessed a fee to produce a copy of a substitute check. The fee will be similar to the amount you currently may pay to reproduce past copies of your checks or monthly statements. Expect to pay about $2.50 per check with many banks offering a limited number of complimentary substitute copies each month.
What Should You Be 'Checking' With Check 21?
There is the possibility of double payment, which means that the paper check as well as the electronic image will be processed for payment. There is also the risk that the amount on the paper check will be changed when it is processed electronically.
Another issue is the greater difficulty in proving forgery and alteration since the substitute check lacks the ability to do handwriting analysis and detect pen pressure.
It is critically important to track your checks by logging each one in your checkbook transaction record and then carefully reviewing your monthly statement to cross-tab all transactions to ensure no duplication or fraud.
What If You Find Errors on Your Bank Statement?
Check 21 includes a provision called Expedited Recredit to protect a consumer should you suffer a loss due to this new processing method.
If you discover that you were charged for something you did not buy, charged an incorrect amount or charged for an amount twice, you must contact your bank immediately (no later than 40 days after receiving your statement).
If your bank validates the error, it will refund the amount as well as the interest accrued (if it is an interest-bearing account) within one business day.
Additionally, if your bank cannot immediately determine the veracity of the claim within 10 business days, it will refund part of the amount in question -- up to $2,500 per substitute check plus the interest accrued. The remaining amount of the claim plus interest must be refunded by the 45th day unless the bank has determined that the claim is invalid.
Will Check 21 Speed Up Deposits Into Your Bank Account?
Unfortunately, the processing speed will not allow consumers to get credited faster for deposits. However, there is a federal rule, the Expedited Funds Availability Act, which stipulates the maximum period of time your bank can take to make funds available to you.
Mellody's Three Check Tips:
Check first: Before you write a check, no matter the amount, make sure you have sufficient funds to cover the transaction. Otherwise, with the diminished float period, you will end up paying hefty overdraft fees.
Balance your checkbook : While this sounds obvious, according to the Consumer Federation of America, only one in eight people actually do so. Additionally, more than ever, it is important to open your monthly bank statement and check to see if your charges are correct. If you discover a problem with your checking account, notify your banking institution immediately.
Bank online: The best way to avoid the possible headache from Check 21 is to eliminate writing paper checks. The typical consumer pays between eight to 15 bills every month. Converting your paper to online payments is a sure way to keep track of your bills as you pay them. Banking online allows you to view a copy of your canceled check with a simple click of a mouse. Other benefits of paying bills online include a bill reminder feature that automatically sends you an e-mail notifying you of an outstanding balance or an upcoming bill due date, the option to select your own bill payment dates, create a log of your payments and assisting you in organizing your overall finances.
Mellody Hobson, president of Ariel Capital Management (arielmutualfunds.com) in Chicago, is "Good Morning America's" personal finance expert. Ariel associates Matthew Yale and Aimee Daley contributed to this report.