Oops! My check bounced and now my bank is charging me an NSF fee. What is that?
An NSF (non-sufficient funds or insufficient funds) fee can happen if you don’t have the money in your checking account to cover a purchase. The bank returns the item unpaid and then charges you an NSF fee.
Unfortunately, NSF fees are quite common. Together with overdraft fees, they make up more than HALF of most bank’s fee income for consumer checking accounts. We’re talking like $11 BILLION each year. But they don’t have to be the story of our lives. Here’s our guide to understanding NSF fees and why they matter.
Non-sufficient funds vs. overdraft fees: what’s the difference?
NSF fees and overdraft fees are often treated the same by banks and consumers alike, but they are technically different. With overdraft fees, a bank opts to pay your expense even though you don’t have the funds to cover it—essentially “loaning” you the money. Then the bank expects you to pay back the expense AND the fee.
With NSF fees, a bank opts NOT to pay your expense if you don’t have the funds—and then expects you to pay the NSF fee on top of that. The tricky thing here is that if you write a check to someone and it bounces, that recipient’s bank may also charge a fee, which might get passed on to you as well.
How do NSF fees work?
Let’s say you write a check to your gas company for $100. But you only have $75 in your checking account. Your bank may choose not to honor your check—aka, your gas bill goes unpaid. Then your bank may charge you an NSF fee. Your gas company might also charge you a fee for the bounced check.
The worst part about NSF fees is that they’re usually charged PER TRANSACTION. So, after you wrote that $100 check, imagine you tried to pay two more bills, one for $10 and one for $15. But remember, you only have $75 in your account. You’d probably get charged three separate NSF fees. It can really add up!
How much are NSF fees?
Typically NSF fees are around $34 for each transaction, but they vary by bank. So if you try to pay three separate bills but don’t have enough money in your account to cover any of them, you might end up having to pay over $100 to the bank in NSF fees!
Most of the time, NSF fees are charged for small transactions ($24 or less), and most consumers pay back the fees within three days. If we compare that to the cost of getting a loan for the same amount over the same period of time, the CFPB estimates that a bank’s NSF and overdraft fees would equate to 17,000% APR![1:1]
My NSF fees seem really high. How is that legal?
Currently, no laws exist to limit the amount a bank can charge for an NSF fee. With that said, your bank might have a policy that limits how many NSF fees they can charge you per day. That’s why it’s important to check your bank’s fee schedule and your deposit account agreement to find out what you might be charged if you ever have insufficient funds.
What if I receive a bounced check?
Sometimes you might get charged an NSF fee if you’re the recipient of a bounced check. Imagine you receive a check as payment for babysitting. But the person who wrote that check doesn’t have the funds in their account to cover the payment.
You deposit the check, and then spend the funds. Now your bank tells you the check was returned unpaid due to non-sufficient funds, AND you’re being charged a fee because now your own checking account has insufficient funds.
But I had a deposit pending!
Unfortunately, even if you have a deposit pending that will cover your expense, you could still get charged an NSF fee. Maybe you missed a cut-off time when you made your deposit. Maybe your funds are deposited but not available yet for withdrawal.
It’s true that banks typically post deposits before withdrawals—but they aren’t required to. And your bank’s online, telephone, or ATM balances might not reflect your true available balance. That’s why it’s still important to balance your check/transaction register.
Do NSF fees impact my credit?
The good news is that NSF fees aren’t reported to the credit bureaus (Equifax, TransUnion, and Experian) so they don’t directly affect your credit. But bounced checks can mean that bills become past due, and payment history CAN BE reported to credit bureaus, which could hurt your credit score.
Also, if you don’t pay your NSF fees, that amount can be sent to collections. That’s because to the bank, an unpaid NSF fee is a debt you owe the bank. The collections account could become part of your credit history and remain there for seven years.
Bounced checks and other “mishandling” of your checking account can also hurt you because it’s usually reported to ChexSystems®. Banks often use ChexSystems® to look at a person’s banking history, and they could use it to justify closing your checking account. Other banks might use this same info to refuse to open a new checking account for you.
How can I avoid NSF fees?
Fortunately, we can all take some steps to avoid or minimize the impact of NSF fees. These include:
- Budget carefully so you don’t accidentally spend more than you have.
- Balance your checkbook to keep track of all your deposits and withdrawals.
- Set up a low balance alert at your bank.
- Link your savings account to your checking account so money is automatically moved to cover any overdrafts.
- Look into an overdraft line of credit at your bank or online loan options to cover unexpected expenses between paychecks.
- Check your fee schedule and deposit account agreement so you’re aware of your bank’s policies.
- Shop for a bank that doesn’t charge overdraft fees on small amounts (like $5).
If you’re a visual person, check out the infographic below.
CFPB staff. (2014, July 31). CFPB Finds Small Debit Purchases Lead to Expensive Overdraft Charges. Retrieved from: https://www.consumerfinance.gov/about-us/newsroom/cfpb-finds-small-debit-purchases-lead-to-expensive-overdraft-charges/. ↩︎ ↩︎
Smith, P., S. Babar and R. Borné. (2020 June). Overdraft Fees: Banks Must Stop Gouging Consumers During the COVID-19 Crisis. Retrieved from: https://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/crl-overdraft-covid19-jun2019.pdf. ↩︎
CFPB. (2017, January 19). A Closer Look: Overdraft and the Impact of Opting-In. Retrieved from: https://files.consumerfinance.gov/f/documents/201701_cfpb_Overdraft-and-Impact-of-Opting-In.pdf?mod=article_inline. ↩︎
Office of the Comptroller of the Currency. (2021, April). Is there a limit on overdraft fees? Retrieved from: https://www.helpwithmybank.gov/help-topics/bank-accounts/nsf-fees-overdraft-protection/overdraft-protection-programs/overdraft-fee-excessive.html. ↩︎
Office of the Comptroller of the Currency. (2021, April). A check I deposited bounced. Am I liable for the entire amount? Retrieved from: https://www.helpwithmybank.gov/help-topics/bank-accounts/nsf-fees-overdraft-protection/nsf-fees/nsf-third-party.html. ↩︎
Office of the Comptroller of the Currency. (2021, April). Can the bank charge an overdraft fee when there is a deposit pending? Retrieved from: https://www.helpwithmybank.gov/help-topics/bank-accounts/nsf-fees-overdraft-protection/nsf-fees/nsf-deposit-pending.html. ↩︎
The Experian Team. (2016, July 17). NSF Check on a Credit Report. Retrieved from: https://www.experian.com/blogs/ask-experian/non-sufficient-funds-checks-on-a-credit-report/. ↩︎
ChexSystems. (n.d.) Impact of Mishandling a Checking Account. Retrieved from: https://www.chexsystems.com/web/chexsystems/consumerdebit/otherpage/ImpactsofMishandlingAccounts/. ↩︎