Friday, October 14, 2016

How Money Order Works: Tips

Money orders are considered a “safe” form of payment. Whether you’re buying or selling something, a money order might be your best option for payment. However, it’s important to understand the pros and cons of using money orders – and when other payment methods are a better choice.

How to Buy: to buy a money order, you’ll need to pay with guaranteed funds. At your bank, you can transfer funds from your checking or savings account. At a retailer, you’ll pay with cash, a debit card transaction using your PIN, or a cash advance on your credit card (credit card cash advances are expensive, so avoid this option).

Tell the money order issuer how much you’d like a money order for, and they’ll print the document for you. You’ll need to write in the name of your payee on the line that says “Pay to the order of.” See detailed instructions for using a money order.

Keep your receipt and any details about your purchase. If something goes wrong, you’ll need that information to track or cancel the money order.

Cost: expect to pay a small fee to get a money order. Fees are generally least expensive at supermarkets and convenience stores – around one dollar or so. Banks and credit unions often charge five to ten dollars to issue a money order. For more details, see a list of locations with pricing.

Purchase amounts: money orders have a maximum limit – often $1,000 per money order. This makes them suitable for smaller purchases. If you need more than that, you can buy multiple money orders (and pay multiple fees) or you can use an alternative method like a cashier’s check.

Getting the money: if you receive a money order, you can cash it or deposit it just like a check.

To do so, you’ll generally endorse the back of the money order by signing your name. Money orders are best cashed at the same location they were bought from (a Western Union or MoneyGram desk, or the bank or credit union that issued them). If you don’t need cash, it’s wise to deposit the funds to a bank account for safe keeping.

Why Use Money Orders?

Money orders are one of many options for making payments. So when does it make the most sense to use a money order?

Alternative to cash: a money order can be made payable to a specific person, which reduces the risk of theft. If a money order goes missing (or gets stolen) it can be cancelled and re-issued.

If you lose cash, it’s gone for good. Mailing cash is simply too risky, so money orders are a good option when you’re mailing a payment. What’s more, you can track the payment and prove that your recipient actually got paid.

No bank account needed: if you don’t have a bank account – whether you don’t want one or you can’t get one – money orders might be your best option for making payments. You can pay utility bills, insurance premiums, and mobile phone bills with money orders each month. However, the cost of buying money orders adds up (and getting money orders takes time) – which might motivate you to open a local bank account.

Keep your information secret: when you write a personal check, that check contains sensitive information. For example, checks often show your home address, phone number, bank account numbers, and the names of any joint account owners (such as your spouse or partner, if any). If you don’t know or trust the person you’re paying, a money order helps protect that information.

Required by seller: some sellers require that you pay with a money order. They don’t want to take the chance of accepting a personal check, and it’s common to request money orders. A cashier’s check would offer the same security, but money orders seem to be preferred.

Send money overseas: if you need to send funds abroad, money orders are a safe and inexpensive way to do so. The money order can easily be converted to local currency, and USPS money orders are well-regarded in numerous countries around the world.

Alternatives to Money Orders

Money orders aren’t the only way to pay. There are several alternatives, some of which offer “guaranteed” funds (and some are even safer than money orders).

Cashier’s checks are similar to money orders – they’re paper documents issued to a specific payee and guaranteed by the issuer. However, banks and credit unions offer cashier’s checks – not convenience stores and money shops. Cashier’s checks are available for larger dollar amounts, so they’re a better choice for large transactions. Learn more about how cashier’s checks compare to money orders.

A wire transfer is an electronic transfer of guaranteed funds. Again, sellers can be confident – even more confident than if they get a money order – that they’re getting paid. Wire transfers are more expensive (about $35 in most cases) and more cumbersome, but they can’t be faked or cancelled like money orders. Learn more about using wire transfers to send money.

Electronic payments of non-guaranteed funds are also an option. If you’re just paying bills, your bank’s online bill payment service can send funds almost anywhere – usually for free. Even if you don’t have a bank account, many prepaid debit cards offer the same service, or you can pay using your card number. Online services and apps can also send money (typically only with people you trust) at no charge.

Personal checks, while old-fashioned, are often good enough. Billers like utility companies and phone service providers often accept personal checks. Online sellers and others (such as strangers you deal with on Craigslist) might request a money order for added security.

Watch for Scams
Money orders are generally considered safe, but they can be used in fraud. In fact, the perception that they are safe is exactly what makes them perfect for scams.

Watching for common red flags will help you avoid trouble. To be safe, never send “extra” money back to somebody who pays too much with a money order – it’s almost certainly a fake. Verify funds on any money order that you have doubts about before you take it to your bank. Finally, avoid paying anybody with a money order if you think you’ll ever need to reverse the payment – you can only cancel before the money order has been cashed.

Limitations of Money Orders

Now that you know the basics, you can appreciate the pros and cons of using money orders. Some of the main drawbacks of money orders are described below.

Maximum limits: money orders are generally issued with a maximum of $1,000. Some money order issuers use an even lower limit (for example international USPS money orders are limited to $700). If the purchase amount is more than $1,000, multiple money orders will be required, which can be cumbersome – and just as expensive as other forms of payment.

Convenience: money orders are easy to get – just go to the customer service desk at a supermarket or visit a bank branch. But other forms of payment are much easier to work with. To get a money order, you often need to get cash, wait in line, wait for a customer service representative (who is doing their best) to complete the transaction, and get the money order into the mail. Personal checks and electronic payments eliminate most or all of those steps.

Trust: most people believe that money orders are safe. Sellers count on the issuer (instead of an individual) to deliver funds. However, money orders can raise red flags because they’re often used for fraud. In some cases, money orders are prohibited or they cause extra administrative work and delays. For example, some financial institutions (like insurance companies and brokerage firms) don’t accept money orders because they can be used in money laundering operations.

How Money Order Scams Work?

Money order scams are common when selling items online. Before handing over merchandise or money, be sure you’re dealing with a legitimate buyer. Be especially careful if you’re asked to send money after receiving a money order.

A scam takes place when somebody pays with a fake money order. Assuming the payment is good, the recipient moves forward with the "buyer's" request (shipping goods or wiring money).

Once the recipient's bank discovers the problem, it is too late to recover products or funds.

Why Money Order Scams Work

Money orders can be a safe way to receive payments. Unfortunately, the sense of security you feel causes you to drop your guard. These scams work because you believe you’ve been paid and there’s nothing more to worry about. In fact, you should always treat money orders (like personal checks) with caution.

Review the Basics of Money Orders

Typical Money Order Scams
"Excess" scams: a typical approach involves an inquiry from somebody far away – another state or country. They say they’ll buy your item, but when the money order arrives it’s for much more than it should be. Why? The buyer will ask you to send the excess money (above and beyond your sale price) somewhere. Perhaps you’re supposed to send the funds to an expensive shipper who handles overseas transactions. Perhaps the buyer will ask you to refund the excess because he couldn’t get a money order for the correct amount.

In any case, you’ll lose that money for good if you send it.

Purchase scams: sometimes a money order scam is much simpler: you just get a fake money order and ship your merchandise. The buyer doesn’t ask you to send cash – they just get the goods for free.

Deposit scams: in other cases, somebody will ask you to deposit (or cash) a money order for them.

They (according to their story) don't have a bank account yet and they don't want to pay steep fees at a check cashing store. Instead, they'd like to sign the money order over to you and possibly even pay you for your time. What could go wrong? Surprisingly, your bank might let you walk out with cash, but that's not the last you'll hear of this money order.

Where Things Fall Apart

If you send (or spend) money that you think you got from a money order, expect problems with your bank. When you deposit a money order into your account, your bank will allow you to use some or all of the deposit immediately. However, the bank has not yet collected the funds from the money order issuer – that’ll take a few days or weeks.

When your bank tries to collect the funds (from Western Union, let’s say), they’ll find out that they’ve got a bogus money order. They won’t get any money, and they’ll deduct the fake money from your account. If your account is empty, you’ll go into the negative and you’ll have to repay the bank.

Plus, your checks will bounce and your debit/ATM card will temporarily become worthless.

If all of this sounds familiar, thieves use the same approach with cashier's checks.

Protect Yourself

What can you do to protect yourself from money order scams? The best thing you can do is work with people you know and trust. But if you want to work with new customers, you may have to expose yourself to some risk  – so you'll need to watch for behavioral cues.

You’ll be able to spot most money order scams a mile away if you pay attention. But when life gets busy it’s easy to miss a detail and forget how these scams work. A major red flag – and something you should never go along with – is a request to send or wire money after you’ve been paid with a money order. Other red flags:

An offer that came from out of the blue (how did this generous, trusting person find you?)
International money orders (although fake USPS money orders are also a problem)
Messages with numerous grammar and spelling mistakes
Refusal to pay you electronically (they can’t wire money or use an online service)
Your buyer is not interested in checking out the merchandise or product details, and doesn't seem to know anything about what he's buying
Your buyer asks for sensitive information like your bank account number, etc
It sounds too good to be true
Always verify funds when you’re paid with a money order. Call the money order issuer and check to see if you’ve got a legitimate document. You can never be 100% certain, but you can improve your chances.

See how to Verify Funds on a Money Order

Each money order issuer can also describe the latest security features printed on their money orders. For example, USPS money orders feature a Ben Franklin watermark, while MoneyGram uses a heat-sensitive patch to reduce fraud.

If you have any doubt, don’t spend the money you get from a money order. Treat it as suspect or be prepared to repay the bank. It can take weeks or months for the bank to figure out that you’ve deposited a bad money order. Most of the time you’ll find out about fraudulent items within a few weeks, but it can take longer.

Feel free to ask your bank for help. They’ve seen money order scams before and can talk about any suspicious transactions with you.