In the financial sector, there is a term that you have likely heard before. That term is Float. I’ll try to define it as it pertains to this article.
Float – To use known time delays in processing of financial transactions to allow for extended time to cover cost of transaction.
Much like any other financial term, there are some good and bad ways to use float. One bad way, is actually illegal in some places. That’s the “check float”. In a “check float” a person writes a check to themselves from an account they have at one institution and deposits it in an account they have at another institution in order to inflate the balance at the second institution and cover any outgoing transactions that would have otherwise been returned. They then write a check from the second institution to themselves and deposit it in the first institution a day or so later to cover the first check. It’s usually illegal because the person is technically writing bad checks. Eventually, it will catch up to them, and they’ll get caught. It should also be noted that with recent Check 21 regulations, checks process much quicker than they used to and have cut back on this practice.
There are less criminal ways to take advantage of float, however. For instance, at my institution, I know that there is a delay between when I tell the bill pay service to send a payment and when it actually is deducted from my account. Because I know that, I can sometimes send a payment a day or two before I am paid in order to make sure the payment gets where it’s going on time. People who get paid on the 1st and the 15th will sometimes get paid earlier when the payday lands on a weekend. That’s a kind of float as well. In some ways, a payday loan is a type of float (legal, but should be criminal in my opinion). People go to a payday loan institution and get a short term loan (float) to gain access to funds before they are paid. When they are paid, they pay off the balance of the loan along with some high-interest and fees.
Using float can be a very slippery slope. In some cases, it’s just illegal and should be avoided. In others, like payday loans, it should be illegal, or heavily reformed. Other uses, like my bill pay example, are more innocent. But, all of them can lead to trouble if the user isn’t careful. Using float once in a while can be fairly safe, but repeated use can often find you in a hole that you dug for yourself. In almost all cases, the necessity of float can often mean your spending has outstripped your earning. Use float sparingly, and legally, and you can avoid the slippery slope.