When you pay for something without having enough money in your account, your bank might cover the charge or they may not. Neither scenario is in your favor since you will pay fees both ways. In the first case, your payment will go through along with a specific bank charge. In the second, the payment will bounce and lead to a non-sufficient funds (NSF) fee or other related third-party and bank charges.
FDIC studies by the Center for Responsible Lending show that NSF fees cost Americans billions of dollars every year. Luckily, a few specific steps can help you avoid NSF fees. Learn the essentials behind NFS fees and how to deal with them if you have opted for the overdraft protection service.
What is a Non-Sufficient Fund (NSF)?
Banking institutions charge a non-sufficient funds fee each time you bounce a payment. An NSF fee can also hit you if you try to cash a bad check. This happens when the issuer doesn’t have enough money in their account to proceed with the transaction.
Bounced payments can incur NSF fees in many ways. If your payment doesn’t go through, the payee may charge a returned check fee alongside the NSF fee your bank imposes. Moreover, you can face late fees, and your account may get handed over to a collection agency. Plus, missed payments on an account may also get reported to the credit bureaus and damage your credit.
Is an NSF Fee Bad?
No, NSF fees are not inherently bad because they don’t affect your credit directly. No NSF fee can impact your score because Equifax, TransUnion, and Experian have no way to learn about them. Checks returned due to insufficient funds do not get individually reported.
Yet, a bounced check can make your credit card or title loan marked as past due. Once you default on your credit cards, the bureaus will soon get informed. Rack up a few late credit card payments, and your credit score will drop. Several bounced checks can also make it difficult to open new bank accounts or use checks in the future.
Are NSF Fees Legal?
Yes, NFS fees are legitimate. Banks and credit unions may charge NSF fees if you lack the money to process transactions. The federal government doesn’t limit fee amounts. Still, most states cap the fees levied, and each financial institution determines the costs it charges.
The Truth in Savings Act requires any bank and credit union to give a fee schedule to anyone opening an account. It’s up to you to review it and understand the potential charges you could face.
Are NSF Fees Refundable?
No bank is under the obligation to waive or refund NSF fees. However, you can always ask for a refund since the bank may be willing to work out a solution with loyal clients. Some banking institutions even waive fees if you meet certain conditions.
Can I Stop NSF Fees?
You have the option to ask your bank to decline any transaction without charging an NSF fee. If they reject your request, you can opt for a no-fee bank or you can select overdraft protection. Do so only if you have funds in your linked overdraft account to cover future purchases.
What Happens If You Have Non-Sufficient Funds (NSF) Fees?
Banks and credit unions charge NSF fees when payment transactions return unpaid. In short, since you have no funds to cover the check, you are subject to a penalty.
For instance, suppose you write a check for $600 to pay your mechanic for some car repairs. The repair shop will then deposit the check into their bank account. Not having at least $600 in your account when the check gets deposited means the bank will probably return it. The returned check will have an NSF stamp and deduct a fee from your account.
To resolve the situation, you must upload funds into your checking account to proceed with the transaction. Then, you need to write a new check to the repair shop. The mechanic also risks getting charged a returned check fee by his bank for depositing a bad check.
Hence, non-sufficient funds (NSF) result in fees and create challenging situations with payees. Below are some examples of when banks can charge an NSF fee and what you should expect.
Due to lack of funds, returned unpaid checks go under the name of bounced, returned, or NSF checks. This means that banks charge a fee when a written check remains unpaid due to insufficient funds to cover pending purchases.
Returned checks may also incur other fees. Once the check gets returned, you might miss your due date and end up paying costly late fees. Late payments made over 30 days beyond the due date could get reported to agencies and damage your credit.
Lastly, the payee may also have to pay a separate returned check fee.
If you deposit a check in a branch, banking institutions must make funds available the next business day. Checks that turn out to be fraudulent will urge the bank to charge an extra fee and deduct the funds from your account. Not having enough money to cover the transactions will accrue even more charges. Also, if you deposit a bad check from someone else, the bank will figure this out, reverse the deposit, and charge you.
Debit Card Transactions
Debit card transactions refer to online and in-person shopping and money withdrawals from ATMs. Banks usually avoid charging NSF fees for debit card transactions declined due to insufficient funds. Without enough funds, any purchase will get denied without further consequences.
However, if you’ve selected overdraft protection and the bank allows the transaction to go through, you may have to pay overdraft fees.
How Much Do NSF Fees Cost?
Most banks charge the same or similar NSF and overdraft amounts. A recent analysis of over one million non-sufficient funds fees shows that the average ranges from $10 to $35 NSF or even more. In 2020, the average bank overdraft fee in the US was $33.47. The reason behind this high cost lies in racking up multiple NSF fees on the same transaction. In short, failing to make a payment that clears your account may force the bank to reprocess the transaction. Each new attempt to charge you results in extra fees on the same purchase.
Still, not all banking institutions levy NSF fees. Some traditional and virtual banks have eliminated overdraft fees of any kind. Conversely, some banks charge up to six non-sufficient funds (NSF) fees a day if you don’t have enough money to cover a purchase.
What is the Difference Between Non-Sufficient Funds and Overdraft Protection Fees?
Banks initiate both overdraft and NSF fees when you have insufficient funds in your account, and both result in hefty charges. However, there’s a significant difference between these two charges. If banks decline your transaction due to lack of funds, you end up with an NSF fee. As opposed to that, banks that decide to cover the transaction simply add an overdraft fee to your account.
When financial institutions charge overdraft fees, they lend you money to make a purchase. With non-sufficient funds, your transaction gets declined, and you incur a fee. Whether the bank will pick up the bill typically depends on:
- Your overdraft protection status if an account is overdrawn
- Your bank’s policies
- Any history of overdraft and NSF fees
- The amount of the negative balance
Financial institutions must ask customers if they prefer overdraft protection when opening an account. Some online banks even offer this option for free or link your account to another as added protection. Whatever their preference, customers have no obligation to opt-in; but if they don’t, and money is lacking to cover a transaction, it will get denied and incur the NSF fee.
Indeed, overdraft and NSF fees look similar on your bank statement and cost the same, but financial institutions count them as separate and must not charge an NSF and overdraft fee for the same transaction.
How Do I Get Rid of NSF Fees?
Non-sufficient funds (NSF) charges can be costly, especially if you consider the domino effect from missing payments on short-term loans online. Here are several tips on how to avoid expenses due to a returned check.
- Monitor your account balance. Remember to review your checking account balance regularly. Your balance may not always reflect every written check or scheduled electronic transaction. Even if the bank considers pending transactions, it can disregard unplanned transactions.
- Track all expenses. Record all debits from your accounts, such as electronic transfers, written checks, debit card transactions, and ATM withdrawals.
- Link your savings account and checking account. The bank will deduct money from savings in linked accounts if you don’t have enough funds in your checking account. As a result, you’ll get hit by a transfer fee, but it’s typically lower than what you’d get for an NSF fee.
- Set up low balance alerts. Check if your bank allows notifications when your balance is approaching the low bracket. This signal will let you know when to stop withdrawing or transfer money into the account.
- Have a financial cushion. Ensure you maintain extra cash in your checking account beyond what you have planned for the month. As a result, you’ll have a backup for a few business days if you miscalculate your balance.
- Select overdraft protection. If you don’t want your savings account or credit cards to suffer, consider the overdraft alternative. Customers who opted for overdraft protection might have fewer fees to settle.
What Happens If I Don’t Pay NSF Fees?
Customers have no mechanism to avoid NSF fees. Banks and credit unions automatically deduct these funds from your account once you fail to pay for something. If charges accumulate and put your account in the red, the bank can close it after a set deadline. Banking institutions can also seize funds in other accounts or pursue other means to service your debt. Sometimes, you can negotiate with your bank to get the non-sufficient funds (NSF) fee refunded.
Non-sufficient funds (NSF) costs are a part of everyone’s financial life and could be irritating if you don’t track them. NSF fees have been under a lot of criticism and lawsuits lately, but they remain legal bank tools.
Luckily, with smart money management strategies, you can avoid non-sufficient funds (NSF) charges. Start by monitoring your bank balances and maintaining a cushion of funds in your accounts. You can sign up for overdraft protection too, but this option has fees of its own.