Jargon Buster: When cash is just an illusion

Our back-to-basics guide to finance continues with a look at the bank clearing system
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The Independent Online
Most of us have come across the phrase "the clearing system", without understanding what it means. The simple answer is that it is the method by which the banks collect the money represented by the cheques paid into their customers' accounts.

Of course, there is no guarantee this will happen. Perhaps the person who wrote the cheque has stopped its payment or doesn't have enough money in his or her current account. In the latter case, the cheque will be returned to your bank marked, "refer to drawer", perhaps with the added words "please represent".

If you get a cheque returned with "refer to drawer", it is up to you to contact the person who gave you the cheque ("the drawer" in bank speak).

"Please represent" is bank-talk for "there are no funds at present, but we believe there will be shortly". Your bank will simply process the cheque again and advise you of what has happened. Meanwhile, you usually cannot draw out the funds it represents.

If all goes smoothly, the money represented by a cheque payable to you is available on the third business day after it is paid in. Until that time the funds are "uncleared" and you cannot get at the cash.

Customers in this situation who want to withdraw money from a cash machine will normally see the message "available pounds 0". This is despite the fact that they will have a healthy balance. Bizarrely, the money is credited to your account but you cannot get at it.

If you are desperate it is possible to draw against uncleared funds. When paying in the cheque ask the cashier if you can draw against the money it represents. If the cheque is from a building society, insurance company or some other well-known source, the answer will usually be yes. However, you will be charged interest on the uncleared funds withdrawn. You must take out the cash at the counter, not from the cash machine.

Remember, cheques are not money. So, if, for example, you are selling a car and the purchaser pays by cheque, do not part with the vehicle until the funds are cleared.

For a small fee, usually around pounds 10, your bank will "specially present" the cheque to speed up the process and advise you when it has been paid. Normally this takes 24 hours. A banker's draft (which is a guaranteed payment) or building society cheque is safer than a personal cheque, but do bear in mind that it will not be paid if it is stolen property. So it is prudent not to part with your goods until you know that all is well.

When you check the balance on your current account it is important to remember that it shows the money in the account at the close of business on the previous day. It does not take account of cheques you may have written that have not yet been deducted from your account or money withdrawn on the day you ask for the balance.

Finally, remember that if you check your balance after paying a cheque into your account on the previous day, the money it represents will be included in the balance but the funds will not necessarily be available.

Confusing? Yes. One day all money will be transferred instantly and electronically. Until then, you have to put up with the imperfections of the system - and the fact that the delays between paying in cheques and getting the funds means that banks and building societies get interest-free use of our money.