What is a 'Money Order'

A money order is a certificate, usually issued by governments and banking institutions, that allows the stated payee to receive cash-on-demand. A money order functions much like a check, in that the person who purchased the money order may stop payment.

Money orders are readily accepted and converted to cash and are often used by people without access to a standard checking account. These instruments are an acceptable form of payment for small debts, both personal and business, and can be purchased for a small service fee from most institutions.

Money orders were first issued by American Express in 1882, and later became popularized as traveler's checks.

BREAKING DOWN 'Money Order'

Since money orders are sold at post offices and many grocery stores and gas stations, they are easy to acquire by anyone who has cash in hand. They can be used for paying most bills and for many purchases. For sellers who are reluctant to accept checks, money orders offer a reasonably safe alternative. Since the money order is prepaid, meaning that the purchaser immediately pays for the money order with cash or other guaranteed funds, there is little to no risk that it will bounce. Although there is a small possibility that the money order might not be genuine, this is relatively uncommon.

How a Money Order Works

A person who buys a money order will have to fill out the name of the recipient on a form and the amount that the recipient should receive. Most money orders have a maximum limit of $1,000. Therefore, a buyer would need to purchase multiple orders if he needs more than the stipulated limit. The financial institution or authorized body that issues the money order to the payer will have the payee’s name, the issuer’s name, and the amount of money that can be cashed. This dollar value does not include the fees charged to the payee, who should factor in costs when purchasing money orders. A bank or credit union will normally charge more than a convenience store to issue money orders.

When a purchaser pays for a money order, it comes with a receipt that includes the serial number of the money order. The purchaser should always keep this information until he is certain the money order has cleared. Without a receipt, tracing a money order can be difficult or even impossible.

The recipient who receives the money order does not necessarily have to go the same issuer that sold the money order to the payee. S/he can have it cashed at her local bank or credit union, but may not receive the funds all at once, depending on the institution's policy. If s/he does not have an account, having the money order cashed at the issuer’s office is a great option. Examples of issuers include the USPS post office and Western Union office. Issuers will most likely only cash money orders that they issued, e.g., Western Union will only accept money orders issued by the company itself, meaning that the money order has Western Union printed on it as the issuer. Convenience stores, grocery stores, and payday loan stores also provide viable outlets for cashing money orders.

A payee does not have to cash the money order right away. S/he can deposit it into a bank account, much as you would do a check. Depositing money orders is a good option for payees who are concerned about the fees charged to cash the certificates at multiple locations. Since the fees are certain to reduce the amount of money that will be received, depositing it with no additional charges at a bank will ensure that the account holder keeps all of the money paid to him/her.

Money orders are not limited to a local setting. A money order can be used as a vehicle to send money outside the country. An issuer who has multiple branches in different countries can issue a money order in one country that can be cashed in another country. International money orders, therefore, provide an inexpensive and swift way to send money across the border.

Advantages and Disadvantages

In some situations, paying with a money order can be safer than paying with a personal check. Since personal checks include the account holder's routing number and bank account number printed on the bottom, this private information can be stolen and used to create and sign fraudulent checks. In contrast, money orders do not include personal information about the purchaser.

On the downside, money orders can be more difficult to track than a personal check. When a check writer wants to determine whether a personal check has cleared, he only needs to visit his bank or look at his online account for information about its status. To track a money order, the issuer must fill out tracking forms and pay an additional fee to learn whether the money order has been cashed. The entire process for researching the status of a money order can take weeks. The United States Postal Service (USPS), however, offers an online money order inquiry service that allows buyers to input the money order number and get an update on its status.

Other Options to Money Orders

In addition to checks and money orders, other financial instruments that can be used to send guaranteed funds to an individual or business include traveler’s checks, wire transfers, bank drafts and cashier's checks.

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