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.
photo credit: marktristan
Shane Ede is a business teacher and personal finance blogger. He holds dual Bachelors degrees in education and computer sciences, as well as a Masters Degree in educational technology. Shane is passionate about personal finance, literacy and helping others master their money. When he isn’t enjoying live music, Shane likes spending time with family, barbeque and meteorology.
I was under the impression that it’s almost impossible to float checks now a days that most ATM’s digitally scan checks and clear them that business night. I remember many years ago that it would take days for checks to clear; now they clear almost immediately!
I never use float, in fact I wish that every single transaction, whether it be a credit card, check write, or swipe of a debit card, would show up immediately. I hate writing a check and then seeing it post two weeks later after I’ve forgotten about it and mentally disregarded that the money has to come out. It’s like having to pay for it twice!
Maybe this is the first indication you have a problem! If you are using float all the time to pay your bills, you have a problem. I would rather see the individual change when bills are due to avoid using float consistently.
I agree with Krant. You have a problem if this is what you are doing. I don’t even think I have heard of this and I also not sure if they are used where I live. I think coming up with a plan where you don’t rely on a float is the best plan.
@littlehouse After the Check21 regulations went into effect, it became much harder to do the check floating thing. Even so, checks still take about 2 days to clear an account if they aren’t processed through one of the fancy machines. It’s a lot harder, but there are still people doing it.
@moneybeagle I agree. I think it would eliminate just about every major problem with funds that most of us have run into. I know there’s been once or twice in my less savvy past where it would have saved me some trouble.
@Krant perhaps I should have explained that a little better. I use it out of convenience. It saves me from transferring money into my checking from savings. 😉
@Miss T See above comment to @krant. For sure, if you are using float to pay the bills, without having the funds available, it is an excellent sign that something needs to change, and soon.
I recently switched from Chase bank to a credit union. My chase bank checks cleared very quickly. My credit union checks take at least 3-5 days from when I deliver a check (usually in a drop box)to the place of business.
When I started college 20 years ago, the school wanted a financial statement to show that my parents can pay for the education. My parents wrote a big check to their own account and showed that statement to the college. The check bounced and they paid the $30 fine. Gotta do what you gotta do.
I used to float checks all the time, but it’s too hard now and it is too mentally taxing. Now at the beginning of every month I put the required amount in my bill account that will pay all the bills I’ve got for the month plus a little extra, and let the auto withdraw do its work.
Don’t forget that almost all financial institutions and insurance companies use the float to their benefit…
Now days, I never hear about floating checks.