How Do Money Orders Work?

Money orders are the kind of financial product you might not encounter unless you're in a specific situation. For example, 35.5% of unbanked households (those without bank accounts at insured companies) pay bills with money orders.

They're less expensive than other non-bank financial products like check cashing, pawn shop loans, and payday loans — plus, they are guaranteed (prepaid) funds that process quickly. A personal check might bounce or take three business days; a money order can go through much sooner.

In other cases, money orders are great options for people who want to send money through the mail, or send money overseas, whether for work, family, or friends. They're not 100% secure, and it's good to be aware of some scams, but here's a primer on how it works.

Money orders are a form of payment similar to checks. Unlike bank or cashier's checks, however, money orders are guaranteed by the issuer, so they have to be purchased with cash or a debit card. (You can pay with a credit card, but those transactions are often processed as cash advances, which carry hefty fees.)

Money orders can be purchased from a U.S. Post Office location for up to $1,000 to recipients in the United States. Orders up to $700 (or $500 for El Salvador and Guyana) can be sent outside of the U.S.

Orders up to $500 carry a $1.20 fee and those between $500.01 and $1,000 have a $1.60 fee. (Money orders issues by military facilities have a $0.40 fee.) But the cost of a money order and accompanying fees can change depending on the seller — and there are many places they can be purchased, from Western Union, to CVS, K-Mart, Safeway, 7-Eleven, and more. Banks and credit unions also sell them (for much higher fees, $5 to $10).

When you fill out a money order, make sure to accurately write the name of the person or business you are paying. Never make a money order payable to "cash," Kevin Outlaw at Bankrate warns. "If you do, it allows anybody in possession of the order to cash it, increasing the chances of theft."

If you're receiving the order, you can cash or deposit it as you would a bank check. Nerdwallet expert Margarette Burnette advises customers to cash orders at the place that issued it, "whether that’s a bank, post office or other location." (Again, doing so will help to sidestep fees.)

Before you deposit your money order, you'll have to come with ID proving that you are the authorized recipient, endorse it on the back, and pay any fees. Transaction fees are typically a few dollars — some percentage of the amount sent.

The USPS will replace lost or stolen money orders for a $5.95 processing fee. You'll have to provide the serial number of the order, submit an inquiry, and then after the status is determined, you will be issued a replacement.

If you're worried about the status of a money order you sent, you can check it online through the digital money order inquiry system.