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Identifying different means of payment

Dear Dr. Don,
What is the difference between a money order, cashier's check, certified check, traveler's check and bank draft? Which one is the most secured method of payment? Thank you. -- Sandeep Selects

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Dear Sandeep,
All of these methods of payment are a way of involving a financial intermediary in the transaction to provide some security and reassurance that the seller is receiving good funds from the buyer. Transaction fees, guarantees, convenience and security all factor into which is preferred as the method of payment -- not just security.

Money order: Issued by both financial and nonfinancial institutions, it is a financial instrument that allows the named individual, or payee, on the order, to receive the amount of cash specified on the money order. The United States Postal Service explains the features of its money orders on its Web site and should be used as a benchmark when comparing other money order providers. The Bankrate feature, "Phony money orders cause increase 'holds' for all," discusses how fraudulent money orders have made banks more cautious in accepting these financial instruments.

Cashier's check: A check drawn by a bank on itself, signed by a cashier or bank officer and payable to a third party, named by the customer. An instrument used to guarantee funds are available. There is usually a fee associated with cashier's checks.

Certified check: A check drawn on a bank account where a cashier or bank officer certifies sufficient funds are available in the individual's account for the check to clear. Funds in the account are earmarked to pay the certified check upon presentation to the bank. A certified check differs from a cashier's check in that the cashier's check is drawn on the bank's funds and a certified check is drawn on the account owner's funds.

Bank draft: A check drawn by the bank against funds deposited into its account at another bank that authorizes that bank to make payment to the individual named on the draft. A sight draft is payable on demand, whereas a time draft is payable at some future date or payable under certain circumstances.

Traveler's check: A check issued by a financial institution in denominations like cash that functions as cash, but the financial institution protects the check holder against its loss or theft prior to its use in a transaction. Unlike a money order, a traveler's check is cashed by the person that purchased the check. Some issuers provide travelers checks free of charge to existing customers. Otherwise, the individual purchasing the traveler's check pays a commission on the purchase.

There are potential fraud issues with all of these forms of payment. It falls to the seller of goods and services to decide what form of payment he will accept, and what recourse he will have in the face of fraud. The buyer, unless it's his intent to defraud, is looking to exchange money for goods or services. In selecting acceptable methods of payment for goods it is definitely "seller beware." Of these methods of payment, the cashier's check is my preference because it is the bank's check drawn on the bank's funds.

I didn't discuss PayPal, wire transfers or other methods of electronic funds transfer. But even a personal check, if the seller waits for the check to clear before he releases the goods, can work as a secure method of payment.

Bankrate.com's corrections policy
-- Posted: Aug. 23, 2005
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