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Personal Finance

How Does a Money Order Work?

You're buying sneakers online when the seller asks you to pay with a money order. Or your Aunt Sue sends a birthday card with a $50 money order inside. Is this a legitimate way to exchange money in 2021? Don't panic: A money order is a safe if somewhat cumbersome way to transact money. Here's how it works.

What Is a Money Order?

A money order is like a paper check that isn't attached to a checking account. You purchase a money order with cash upfront from your financial institution or a service like Western Union, MoneyGram or the U.S. Postal Service (USPS). Because the funds are prepaid, a money order can't "bounce" like a check; as long as the money order is real, the funds are guaranteed. In 2021, you may be more inclined to send a secure payment digitally through an app like Venmo or PayPal, but money orders are still a valid way to pay—and a preferred method for those who prefer to keep things old school.

When Should I Use a Money Order?

Money orders are an alternative when you need to pay for something with a check but don't have a checking account. They're also useful if you'd rather not disclose your banking information to the party you're paying—or you're leery of sending that information through the mail. Sending money to someone in another country? Money orders can be a good way to dispatch guaranteed funds internationally.

Because a money order is like a prepaid check, landlords and other vendors may view money orders as a safer way to accept payments. Money orders have benefits to payers as well: You can track a money order to verify payment and make sure it landed in the right hands. You can also cancel a money order, just as you would a check.

But money orders aren't foolproof. They can be subject to scams (more on that in a bit). They can also be pricey and inconvenient, especially if you use them regularly to pay bills and do routine transactions. Opening a basic checking account can help eliminate the need for frequent money orders. You might also consider using electronic payment platforms like Zelle, your bank's online bill pay system or the payment features on selling sites like eBay. They can help you send and receive funds securely without the time and hassle of purchasing and mailing a money order.

Where Can I Get a Money Order?

Money orders are available in a surprisingly wide variety of places. Your bank or credit union probably offers them, but so do many supermarkets, retailers like Walmart, gas stations, convenience stores and the post office. Check any of these locations near you to find options.

A few things to consider: If you're sending money to another country, make sure the money order provider you're using will work in that country. Also, most providers limit the size of money orders you can purchase. For example, the largest money order you can buy through the USPS is $1,000. If you're trying to pay a $2,500 bill, you'll need two $1,000 money orders and one for $500.

How Much Do Money Orders Cost?

Fees for money orders vary based on where you purchase them. For instance, USPS charges $1.30 for money orders up to $500 and $1.75 for money orders with a value of $500.01 to $1,000. Fees at Walmart top out at $1, whereas bank fees may run as high as $5, though these fees may be waived for account holders. Expect to pay a bit more if you're sending money internationally.

Plan to use cash or a debit card to cover the full value of your money order plus fees. Some providers will allow you to purchase a money order with your credit card, but this should be your option of last resort. Your credit card issuer will likely consider your purchase a cash advance, which makes it subject to fees and higher interest rates.

How to Fill Out a Money Order

Filling out a money order isn't difficult, but it's important to be accurate because you can't alter a money order once it's completed. Most critically, make sure the name of the person or business you're paying is spelled correctly. The recipient will be required to show ID when they cash the money order, so a mismatched name won't work. Be prepared to list your address in the purchaser's section and to sign the money order to complete the process.

Once you're done, keep the receipt: You'll need it to track your money order and confirm that it's been cashed or deposited. You'll also need your receipt to cancel the money order if it gets lost or stolen, or to prove to the recipient that you purchased the money order in the first place.

How to Avoid Money Order Scams

Unfortunately, money orders aren't scam-proof. Be sure you're aware of potential money order scams, especially if you've received a money order from someone you don't know. Most scams involve people sending fake money orders, for instance to pay for an item you're selling or put a deposit on a vacation rental. In a common scam, you may be asked to deposit the money and wire some of it back to the buyer, keeping a portion for yourself.

The danger comes when you deposit the fake money order and your financial institution credits your account. Eventually the bank will discover the fraud and reverse your deposit. At that point not only are you out the value of the money order, but you may also be liable for overdraft fees if your account goes negative. If you refunded the scammer any money, you are doubly out of luck.

Although the $50 from Aunt Sue is probably legit, consider these steps to help reduce the chances of fraud if you have doubts about a money order you've received:

  • Verify funds. You can contact Western Union, MoneyGram or the USPS directly to verify funds on a money order. Verification doesn't guarantee a money order is problem-free, but it can help weed out more obvious scams.
  • Look for signs of trouble. Money orders have security features like heat-sensitive stamps, ink that runs when exposed to water or watermarks that are visible when held up to light. If your money order looks fishy—or counterfeit—don't honor it until you're certain it's real.
  • Get cash. If you can, exchange the money order for cash before depositing it into your bank account. It may cost you a few dollars in fees ($4 is typical for a $1,000 money order), but you'll avoid the risk of reversed deposits—and the weeks of wondering whether the money order was legitimate.

A Time-Honored, Workable Option

Money orders are a valid way to exchange money when you're making a large purchase, putting up a security deposit or sending funds through the mail. If you need to purchase or cash a money order, check out your local options, including your financial institution, supermarket, local Walmart or even the post office. Money orders aren't necessarily the fastest or most secure payment choice in the digital age, but they're a workable, affordable option that doesn't require good credit or a bank account.