Key Takeaways
- Uncollected funds are initially unavailable to the depositor until the bank verifies the funds and they clear the banking system, protecting both banks and customers from fraud.
- The term “uncollected funds” is often associated with a hold on deposits, particularly with checks written for large amounts, to ensure the funds are received from the issuing bank.
- Uncollected funds charges, also known as UCF fees, may occur if a check is written against unavailable funds, and these fees can be as high as non-sufficient funds (NSF) fees.
- The existence of uncollected funds allows banks to engage in short-term investments during the hold period, contributing to their financial returns.
- While uncollected funds can protect against fraud, some critics argue that related fees are unfair and excessive, especially since the holding period can be uncertain.
What Are Uncollected Funds?
Uncollected funds are the portion of a check deposit that a bank temporarily holds until the check clears and the money is verified, a step that helps protect banks against fraud. They’re part of the check-clearing process and can support money management by preventing account overdrafts, though customers may face holds or fees while funds remain unavailable.
How Uncollected Funds Work in Banking
Uncollected funds come from deposits that must clear with the depositor’s bank before use.
The Check Clearing Process
The bank must verify that the deposited funds have been received from the bank that issued the check to the payee. Until then, the bank refers to the funds as uncollected funds, coded as “UCF” or “UF” for short, and deposits appear as “pending.”
A check for a large amount that is deposited to an account is subject to a hold on most of the amount. A portion typically is made available immediately to the depositor as long as the customer is in good standing with the bank.
Managing Uncollected Funds Fees Effectively
A check written against an account with uncollected funds that bounces normally results in an uncollected funds charge. This charge is also called a UCF fee, and it is usually the same as the bank’s non-sufficient funds (NSF) fee. However, a growing number of banks have decided to stop charging NSF fees.
No uncollected funds charges are incurred if the available checking account balance can cover checks written against it.
Benefits of Uncollected Funds for Banks and Customers
Fraud Protection
Many people complain about uncollected funds, but they help protect banks and customers from fraud.
Without uncollected funds, it would be possible for someone to write a bad check on one bank account, deposit it in another, and then withdraw supposedly available cash.
This scheme is so easy and obvious that normally law-abiding people in need of money, perhaps those facing bankruptcy, might be tempted by it. Even worse, criminals could force innocent people into such schemes and then make them turn over the money.
Money Management Support
Uncollected funds are a way for a bank to tell customers that it received a check deposit, but the funds are not yet available. Customers can consider the uncollected funds phase a short waiting period that supports good money management and helps them avoid unnecessary overdrafts.
For example, a customer might deposit a check by sending it to the bank through the mail. When the bank gets the check, it will designate a portion of it as uncollected funds.
When the customer reviews their online banking account, they will see the uncollected funds status and know that the bank received the deposit. The customer can then check back later to see if the funds have cleared. If they’ve been made available, the customer knows that they can use the money as needed.
Short-Term Investments
During the uncollected funds hold period, banks use these funds for short-term investments that can add to their returns and income.
Understanding Criticisms of Uncollected Funds
Fees Are Unfair
Customers who face uncollected funds charges often find them to be unfair. People often assume that when they deposit checks, the money is immediately available for spending. From this point of view, an uncollected funds charge is a sneaky way for the bank to make money.
Fees Are Excessive
There is also a good argument that UCF fees are excessive. The fact that they can be the same amount as NSF fees is particularly irksome.
A person writing a bad check normally has no reason to believe it will clear, while someone with uncollected funds might think their money is available.
Furthermore, there might be little or nothing in an account with insufficient funds, leaving the bank with a loss and a need to collect. On the other hand, it is easy for the bank to take UCF fees out of the uncollected funds when they are cleared, which usually happens within a few days.
Hold Periods Are Uncertain
Since uncollected funds aren’t available immediately, when do they become available? In a day? In a week? Check clearing times can be hard to determine and a source of frustration for customers. Granted, this was more of an issue before online banking made it easier to determine the status of deposited checks. Still, not everyone banks online so indeterminate holding periods may continue to be an issue for some.
Important
The best way to avoid uncollected funds charges (UCF fees) is to check your account balance online after making a deposit. Make sure the deposit is part of the available balance rather than uncollected funds before spending it.
Practical Examples of Uncollected Funds Scenarios
Example 1: Jack, a longtime customer of Hometown Community Bank, deposits a $1,000 check on Monday. $100 is available for withdrawal right away. However, the $900 balance is designated as uncollected funds, so Jack must wait until the check clears later in the week to draw upon that amount. If Jack tries to write a check against the balance and it has not yet cleared, Jack will incur an uncollected funds charge.
Example 2: Christine runs a small graphic design company. A new client sends her a check for services rendered. Christine deposits the check into the company’s business account knowing that the money is seen as uncollected funds and won’t be available immediately. Because the client’s bank isn’t local, it takes a day longer than normal for the check to clear. But business is good, so she uses her existing account funds until the uncollected funds become available.
Uncollected Funds vs. Insufficient Funds: Key Differences
It is crucial to make a distinction between uncollected funds and insufficient funds. Unlike uncollected funds, an account with insufficient funds will not show a deposit pending. Such an account does not have enough money in it to meet demands against it.
Writing a check with insufficient funds will result in a bounced check and a fee. In fact, people who knowingly write a check against an account with insufficient funds may be committing a crime.
On the other hand, writing a check with uncollected funds can work if it’s not cashed until those funds clear.
How Long Can Banks Put a Hold on Uncollected Funds?
According to the U.S. Office of the Comptroller of the Currency, banks must make $225 from your deposit available the day after you make the deposit. And then, normally, the uncollected funds should be available on the second business day after the deposit was made. Holds can be extended if there is cause for concern involving the funds, the account holder, or the source of the money for deposit.
What Does Uncollected Mean?
It refers to the fact that the funds relating to a bank deposit made by an account holder have not yet been received—collected—from the bank that issued the check for deposit. Movement of money, even electronically, must be verified, or cleared, by financial institutions before that money can be made available to customers.
Is Writing a Check on an Account With Uncollected Funds a Crime?
Not if there are available funds in the account that can cover the check. And if a check bounces, most account holders will be charged a UCF fee rather than with a crime.
The Bottom Line
Uncollected funds are the portion of a deposit that stays unavailable until the bank verifies and clears it, helping deter fraud and reduce accidental overdrafts. If you spend against funds that haven’t cleared, you may face a UCF fee, so check your available balance. Online banking makes monitoring pending versus available funds easier, even if the holds and fees frustrate some customers.