How Do Money Orders Work?

You probably rely on a combination of cash, credit cards and even personal checks to cover your daily spending. But every once in a while, a scenario might come up in which you need to use a money order – whether it’s sending money internationally or delivering a payment without worrying about putting yourself in jeopardy of fraudulent activity.

Since money orders aren’t used that often by the average person, you may need to brush up on what money orders are and how they work. Read on to learn more about money orders and when it makes sense to use them as a payment method.

A money order is a prepaid, guaranteed form of payment that is backed by a financial institution. Money orders are capped at a certain amount, which varies by issuer, but is usually around $1,000.

When you purchase a money order, you pay the face value, plus any associated fees. It’s then issued by the institution, with the name of the recipient and the amount printed on it. You also sign the money order, which serves as a form of verification.

Once the money order has been purchased and issued, it can be used to make a payment or send money to a recipient. The recipient can then deposit the funds into his bank account or cash it at a location that accepts money orders.

In other words, “a money order is like a prepaid check,” says Jack Prenter, CEO of DollarWise. He adds that paying with a money order is often considered safer than sending cash. Plus, it can be more convenient than a check, since it doesn’t require a bank account to purchase or cash.

You can get a money order at a financial institution, like a bank or credit union. United States post offices also sell them, as does Western Union.

You can also purchase money orders from convenience stores like 7-Eleven, pharmacies like CVS, retailers like Walmart and payday loan stores.

When purchasing a money order, you’ll need to follow certain steps:

Paying via a money order is best when you need to send money securely, especially if a bank account isn’t involved, Prenter says. For example, you might use a money order when sending money through the mail, internationally or to a business that doesn’t accept personal checks, credit cards or other forms of payment.

“Think of a money order as a secure and traceable way to send cash,” Prenter says. “It’s a handy option when a regular bank transfer won’t cut it.”

A downside to paying with money orders is they come with fees. For one, you’ll pay a purchase fee when obtaining a money order. The fee will vary depending on the particular financial institution and the amount of the money order.

At Walmart, for example, you’ll pay a maximum fee of $1.

If you go through the U.S. Postal Service, you’ll pay $1.75 for a money order up to $500, or $2.40 for a money order of $500.01 to $1,000. Postal military money orders cost just 60 cents, while international money orders (up to $700) charge an issuing fee of $49.65 and a processing fee based on the destination country.

Banks and credit unions often charge around $5 for money orders. However, some may offer free money orders to certain checking customers. Some institutions may charge additional fees for cancellation or replacement of a lost or stolen money order. Some may also offer discounts for members of certain groups, such as military personnel or senior citizens.

Also, keep in mind that money order amounts are capped. So, for example, if a bank issues money orders up to $1,000, but you need to pay $2,000, you would need to buy two money orders and pay two separate fees.