Banking 101: What is an NSF Fee?

Banks with more than $1 billion in assets collected more than $11.45 billion in overdraft and nonsufficient funds (NSF) fees in 2017, according to the Center for Responsible Lending. That total — compiled by the center using Federal Deposit Insurance Corp. data — is up $10 million from 2016 and 2.4% from 2015.

The recent report labeled the upward trend as “troubling,” citing possible daily fees between $102 and $216 among those largest banks.

The center said NSF fees, which a financial institution can charge to an account owner when they lack funds to cover a transaction, are extraordinarily high “in an era when processes are highly automated, and it costs little to the bank to deny a transaction.”

If you have an account with little in it, these fees could be a recurring problem for you. Having a better understanding can help to keep you from paying these fees.

NSF fee vs. overdraft fee: What’s the difference?

While overdraft and NSF fees are often described interchangeably — and several financial institutions treat them the same — there is a major difference.

A bank can charge an overdraft fee when the account doesn’t have sufficient funds to cover a debit. In that case, the bank will cover the overdraft. Overdraft protection is sometimes called courtesy pay since a bank helps you cover the amount.

While NSF fees can kick in when an account owner has insufficient funds to cover a debit, the bank does not pay the debit amount. This is also referred to as a bounced or returned check.

Ken Tumin, co-founder of DepositAccounts, a LendingTree subsidiary, talked about similarities.

“We have found that overdraft and NSF fees are usually the same dollar amount per transaction at most banks and credit unions,” he said.

Source: DepositAccounts

NSF fees for bounced or returned checks

These fees can also apply to checks, both when writing a check with insufficient funds or receiving a check from an account with insufficient funds. If a consumer chose to opt out of overdraft protection and has a bounced or returned check, they could be charged an NSF fee.

Separate from charges by the bank or credit union, you could face a fee from the merchant. While states set a limit on these fees, they are generally between $25 and $35. Some states also allow merchants to charge a percentage of the check as the fee. If you receive a returned check, the bank could charge you a fee for having to handle it.

It’s worth noting that, besides monetary damages, your financial future could be affected. Financial institutions can report bounced checks and unpaid NSF fees to ChexSystems, a consumer reporting agency that monitors your banking activity and assesses the risk of opening new accounts. This could lead to you not being approved for financial products for which you are applying. Depending on the state where you live, you could also face legal issues, including civil or criminal charges, especially if it’s a bad check.

The best thing to do is contact the person to whom you wrote out the check. If you receive a bad check, your options include sending a certified letter, contacting the bank after a few days to see if there are sufficient funds to honor the check, suing in small claims court or notifying a collection agency.

How to avoid an NSF fee

Tumin said that since these fees are often the same as overdraft fees — when overdraft protection can apply — you may not see a difference in the fee amount from your bank.

“However, overdraft protection may save you from extra fees incurred from recipients of insufficiently funded payments,” he said. He added that if overdraft protection is implemented with overdraft transfers from a savings account, the overdraft transfer fee is typically smaller than the overdraft fee. For some institutions, such as Ally Bank, an overdraft transfer is free, he said. Other ways to avoid these fees include:

• Tracking your balance carefully and setting up low balance alerts to know when you’re at risk of overdrawing your account.
• Linking your checking account to a savings or money market account. This will enable you — if you run out of money in your checking account — to pull money from the linked account to cover new transactions. It’s worth noting, however, that there might be fees for these transfers.

Whatever your circumstances, err on the side of caution and check your account regularly to avoid giving your money away to financial institutions.