Will Direct Deposit Reduce Credit Holds?

by Gary Foreman

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Hi Gary,
Is there any advantage to the consumer to have direct deposit? My company sends payroll checks to be given to associates on Friday. However, my check is direct deposited and should be available on Friday according to my Payroll Department. When I talked to a telephone representative of my bank she said that the funds are not available until Tuesday when the bank gets my funds from the Federal Reserve. I don't understand why I want direct deposit if I can cash my check on Friday and have the money, but if I direct deposit, it won't be there until Tuesday. Is there anything that I can do? Or did I agree to all of this in the fine print somewhere? I am tired of the fees and the hassle. I think that I may be better off with my money under my mattress or with a loan shark.
Stumped in the Midwest

According to the National Clearing House Association (NACHA), there are over 4 billion direct deposit transactions each year. It is estimated that two thirds of the private workforce now use direct deposit.

For those who have not been exposed to direct deposit, it's a system that replaces a paycheck. Instead the employee's pay is directly deposited into their bank by computer and the employee gets a statement from the employer that looks like the stub portion they used to get on their paycheck.

There are two major benefits for the employee. First, they avoid a trip to the bank every payday. NACHA estimates it takes the average person 25 minutes to drive back and forth to the bank and make the deposit. In today's busy world, anyone that can save me 25 minutes a week is my friend!

The second advantage for employees (contrary to Stumped's problem) is that the money is available right away. With a paper paycheck, the employee's bank had to physically send the check to the employer's bank for payment. Many banks wouldn't let the employee get cash until the check cleared.

In 1987, the Expedited Funds Availability Act set rules for hold periods. So-called "local" checks can be held up to two business days and out-of-state checks and ATM deposits for five business days. Some states have their own laws on check clearing that could be tighter.

Direct deposit eliminates that wait for the employee. Because the money is moved electronically, there is no paper check to clear, so funds can be available to the employee the same day that they move from the employer's account.

So what's happening in Stumped's case? Generally, banks will not hold direct deposits beyond the day they're credited to your account. As her payroll department said, that should be on Friday.

It is possible that the bank is not crediting her account the day the money is received. If that's true, it should have been explained when Stumped opened the account. Of course, Stumped is right. It was in some very fine print.

What should Stumped do? Getting a paper paycheck cashed on Friday isn't likely. She can ask the bank, but it would be unusual if they would make it available before a direct deposit.

Stumped will want to question her bank. Doing it in person could reduce the opportunity for confusion. She should get a clear explanation of when the money is available and copies of any rules that apply. It is possible that there was miscommunication on Stumped's original call to the bank. But, in all probability, the bank is following its policy as well as state and federal laws.

That would leave Stumped the option of changing banks. She might want to check out the bank that her company uses. Not only should they clear the funds the same day, but they may also offer special packages for company employees as a way to increase their business.

Another option for Stumped is find a way so that a two-day hold isn't important to her. Obviously, that's not easy. But, if a two-day delay in receiving your pay can cause trouble, think what will happen when a sickness, layoff or other unexpected financial crisis occurs. Stumped might want to use any extra income (like tax refunds, bonuses or raises) to build up a cushion to free her from the tyranny of check clearing.

Finally, unless Stumped is hoping for a walk-on role in The Sopranos, she's wise to avoid the loan sharks. And, even then, she's probably still better off with the mattress!

Gary Foreman

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter. Gary is also available for audio, video or print interviews. For more info see his media page.

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