You might be a bit too old to remember Publisher’s Clearing House, even though they’re still around. They’d convince old people to buy a bunch of crappy products through a catalog, and then enter them into a contest to win $1 million. Of course, you had to buy more things to get more entries, making it questionable at best and a pseudo-crime at worst, but, hey, at least everyone had fun losing money, right?
Well, this is a different type of clearing house. This factor involves your checking account.
The bulk of banks in the U.S. financial system are members of the Federal Reserve. When banks settle checks between different financial institutions, they rely on the Federal Reserve to act as an intermediary, mainly because the central bank is the guarantor of every paper dollar note that you have in your pocket.
Let's say that you're a customer of Bank of America. You receive a check from a friend who banks at Citigroup for $100. When you cash that check at Bank of America, it will take a few days for the check to clear.
When a check is “clearing,” money is moving through the financial system in the form of Clearing House Funds. These funds are the monies that are passing through the Fed’s central processing system and traveling to these member banks. Once the debts between the banks are reconciled, a check clears. You receive your money, and the same sum is deducted from your friend’s account.
Now you can buy a meat thermometer without your credit report receiving a negative mark.
Related or Semi-related Video
