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How money orders work: Old-fashioned payment method still useful for some

Chris Kissell @bankrate
May 19, 2016  in  Smart Money ullstein bild/Getty Images

How do money orders work?

They might seem old-fashioned — like rotary phones and wristwatches. Indeed, they’ve been around since the horse-and-buggy days of the 1860s. But the good old money order can still have a place in your financial toolbox.

What is a money order?

A paper document that allows you to securely and inexpensively send cash to an individual or vendor.

A money order is an alternative payment method to cash and checks when you need to send funds. With a money order, you pay an issuer in the amount you plan to transfer.

In return, you receive a paper document similar to a check that includes the dollar amount of your payment. You then mail or deliver the money order to the person or institution you are paying.

How to purchase and send a money order

To purchase a money order, you first need to locate an issuer. Outlets that sell money orders include:

A money order must include 3 key details that should be familiar to anyone who ever has written a check:

In addition, there is a memo line — just as on a check — where you can record a note about the nature of the transaction. Money orders also come with a receipt. It is crucial to keep the receipt for your own records.

You likely will have to pay a small fee for the money order. Such fees can range from about 50 cents to several dollars, depending on the issuer.

Typically, you must pay for a money order with cash, or a debit or credit card. You cannot pay with a check.

When the recipient gets the money order, he or she must sign the back and provide proof of identity before receiving the cash. Many of the institutions that issue money orders also cash them.

Why you would use a money order

Money orders may be a good option in several situations where you need to make a payment, says Robert Stammers, director of investor education at CFA Institute.

“Money orders can be an inexpensive way to occasionally pay bills or transfer money,” he says.

For example, you may need to use money orders in these cases:

You do not have a bank account. Money orders work similarly to checks, and make sense for those who do not have a checking option but need to send payment. Nearly 12% of households do not have a checking account, according to the most recent FDIC National Survey of Unbanked and Underbanked Households.

In addition, Stammers says that some people who do not want to open a bank account can “store” their savings in the form of a money order that can be cashed at any time.

The seller demands it. Many sellers of goods and services do not take personal checks as a payment method, and may insist on a money order instead.

You want extra security. Every check has your banking details — including the bank’s routing number and your account number — at the bottom. This opens opportunities for fraudsters to gain access to the money in your checking account by creating fake checks with your bank information.

By contrast, the U.S Postal Inspection Service flatly states that “postal money orders are as secure, if not more so, than any other financial instrument.”

Stammers says money orders have other advantages. For example, they do not require you to have a bank account or online access to make a payment, he says.

“Money orders are prepaid,” he says. “Unlike personal checks, there is no risk of overdraft.”

Transferring money via money order is often far cheaper than using other payment methods, such as a wire transfer, Stammers says. A lost or stolen money order also can be voided and replaced for a stop-payment fee.

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Drawbacks of money orders

Money orders also come with a few drawbacks.

The future of money orders

While money orders are still viable for some people, they are likely to become less relevant in coming years, Stammers says.

“The reality is that money orders may be going the way of the horse and buggy,” he says.

Using snail mail to pay bills is cumbersome and slow, he adds. Many people prefer to pay bills or transfer money online, and that trend is likely to grow.

And instead of using money orders, many people prefer prepaid debit cards as an alternative to carrying cash or having a checking account.

“Even people who have been denied a checking account by a bank can use prepaid debit cards that will allow them to make purchases online and in stores,” Stammers says.




