Definition of a Money Order

A money order is a prepaid note used by a bank or other institution that demands payment for a specific amount of money. Money orders are issued by trusted entities and are therefore accepted when personal checks are not or when the debtor does not have a checking account. Money orders can be obtained at banks, post offices, grocery stores and often convenience stores for a small fee.

History

The money order was first created in Great Britain by a private firm in 1792. The first money orders were expensive and not widely used. The private firm sold the money order establishment to another private firm in 1836. Fees were reduced, and the money order became more popular but still not widely used until the British postal service took over in 1838. The postal service lowered fees once again, making the money order easily obtained by the average person and therefore profitable for the post office.

Function

The function of a money order is to transfer guaranteed funds from one entity to another. Money orders are purchased for a specific amount so they are more limiting than cash. However, because they are prepaid, they are accepted just like cash. A person often uses a money order when he does not have a personal checking account and needs to send money a long distance or in cases where the receiver of the funds does not accept personal checks.

Limitations

Because money orders are prepaid, they are for a specific amount of money and must be cashed in full to obtain the funds. A person can, in some cases, make a purchase with a money order and receive the change back as cash, but only if the retailer accepts money orders. Many retailers do not accept money orders. Money orders are more easily counterfeited than personal checks and cashier's checks and thus are not usually accepted in the insurance and brokerage industries.

Cost

Buying a money order is more than simply exchanging cash for a check; buying a money order is also purchasing a service and therefore a fee is charged. The product is the actual check or bank note and the service is the promise from the bank or postal service that the check is good and will therefore not bounce when deposited for withdrawal. As of 2010, money order amounts in the U.S. can not exceed $1,000, and the fee usually ranges from $1 to $5.

Alternatives

There are many many alternatives to the money order. Online bill pay, which is usually free, and prepaid debit and credit cards have just about wiped out the need for a physical check. Individuals who don't have checking accounts can purchase prepaid credit cards at most retail stores, far more convenient than visiting the bank or post office. This convenience has once again made money orders less popular than other alternatives.