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Check Clearing: Definition, Process & Rules

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  • 0:00 What Is Check Clearing?
  • 1:03 Basic Process of Check…
  • 1:42 Rules
  • 2:06 Lesson Summary
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Lesson Transcript
Instructor: Rana Abourizk

Rana has a Masters Degree in Business Administration and is pursuing a Doctorial Degree. She has been teaching online for over a year. She has a strong business background.

Have you ever wondered what happens when you deposit a check? This lesson will discuss the details of check clearing. We will examine the definition, process, and rules for check clearing and then review an example.

What Is Check Clearing?

Check clearing is the process of moving funds from one account to another. To make this easier to understand, let's think about a regular banking transaction, such as depositing checks.

Cindy goes into the bank to deposit ten checks she received from her graduation party. The ten checks total $1,650, but the available balance in her account today is $200. The available balance is what Cindy can use right away. The bank only lets Cindy have $200 today because the funds from the checks she just deposited need to clear.

What does that mean? It simply means that the checks, once deposited into the bank, need to be transferred to the clearing system, which then communicates with the other banks that the checks are from. The bank that Cindy uses has a policy of allowing customers to access the first $200 dollars, as long as their accounts are in good standing.

Let's take a deeper look at the check clearing process and some rules that govern it.

Basic Process of Check Clearing

A customer pays for their goods using a check. The check is presented to the business. The business deposits the check in their bank. The bank sends the check to a central clearing house. This can be either a Federal Reserve bank or a private clearing house. A check that is drawn on another bank and is presented to a clearing house is called a transit check or a not-on-us check. The clearing house then communicates with the issuing bank to make sure that the money is available. If the money is available, the funds are cleared. If the money isn't available, then the check is returned, and the bank can charge the depositor who wrote the check an overdraft fee.

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