An insufficient funds (NSF) fee occurs when you try to spend more than what you have available on your account. This can happen when the cheque you wrote gets approved or when a prior-authorized transaction is taken out of your account, and the report is subsequently overdrawn. If the error is discovered, the bank might charge you a high fee that could easily reach $50.
There are ways to avoid the effects of non-sufficient funds from affecting your balance.
Non-sufficient funds example
Tom wrote a cheque for $2,000 payable to a roofing contractor and did not realize the amount was $1,800 on his account. Tom’s bank returned the check and stamped it in the form of “NSF” for not having sufficient funds. They also deducted the amount of $38 out of his bank account to pay an NSF penalty. Tom went straight into his account to deposit a check that would be more than what he owed to the roofing company and pay the NSF fee. Tom sent a second check to the roofing company that cleared without issue.
Tom signed up for overdraft protection to avoid being charged a second NSF cost. He had small savings account with the bank. He allowed the bank to tap the account to pay for checks if there weren’t enough funds on his account to cover the bill.
What happens if you receive the NSF fee?
Suppose the transaction, for example, pre-authorized payments or a check, reduces your balance to zero. You may decide to deny the transaction due to insufficient funds or even approve it and charge an excess cost.
You’ll likely be the NSF charge if you don’t have protection for your overdraft and don’t have overdraft protection. You will probably see an NSF (or insufficient funds) notification on your receipt or the description line on your statement from the bank.
The price for the NSF fee varies based on the financial institution; however, an NSF fee from Canadian’s Big Five banks typically ranges from the $45-$48 range.
There is also the possibility of receiving an invoice from the recipient of your transaction as the return cheque fee. This charge is along with the original NSF fee from your bank.
Effects NSF charges
The effect that an NSF charge will be different. The cheque could be considered dishonored or bounced in other situations, resulting in legal issues. Sometimes the financial institution could try to fund the transaction using funds from another associated account, for instance, your savings account.
NSF charges could deplete your bank account savings, but they also affect your score on credit. While a cheque that is bounced isn’t recorded with credit agencies, inadequate funds could result in an unpaid or late payment that could be recorded. Furthermore, that credit will be transferred to collections and appear on your credit record. Suppose you are constantly absent from enough funds available to cover your debts. In that case, you could be considered a credit risk to lenders.
If you draft a cheque or pay for a transaction that you aren’t sure you have enough money to cover, you may be subject to criminal charges for fraudulent cheques.
If you believe that the NSF charge is a legitimate error, and, besides this one flaw, your account has been in good standing for several years, it is possible to get your bank to eliminate the NSF fee. All you need to do is request.
How to stay clear of NSF charges
Some of the most efficient methods to avoid NSF costs include
- Monitoring your bank account balances
- Spending tracker budget budget
- Set up alerts for balances that are low
- Using a prepaid card
- The ability to have multiple accounts with financial institutions to ensure that additional funds are in place to cover any eventualities.
The process of signing up to protect your overdraft is the most accessible and most affordable option to stay clear of NSF costs.
What is overdraft protection?
Overdraft protection can be described as a credit that can extend the balance of your account beyond the actual amount by whatever amount you want to apply for. It protects your bank account against the negative consequences of overdrafts.
If you overdraw your credit card account, it will be deducted from the amount you choose to draw from. You’ll receive assessed daily charges of around 21% per month until the amount of your overdraft is returned.
The kind of plan for protection against overdrafts you pick at your financial institution, along with your interest rates, you’ll be charged a per month or per month fee for protection from overdrafts. The charge is usually $5 per month or peruses per month.
If you are only dipping into the overdraft now and then, protection might not be suitable. However, if you regularly go overdraft often, it could be worthwhile to purchase overdraft protection.
Overdraft vs. NSF Fees
Overdrafts and non-sufficient funds are two different terms; however, both are related to a deficit in funds and may result in charges. The banks have to pay NSF charges when they are required to return the payment (e.g., cheques, etc.)) as well as overdraft fees when they allow checks to overdraw checking accounts.
Imagine, for instance, $100 available in your account for checking. You decide to make an automatic clearing house (ACH) or electronic check payment to pay for $120. Suppose the bank you have chosen to use refuses to honor the check. In that case, you will be charged an NSF fee, and you are subject to any fees or penalties the seller imposes on rejected bills. If the bank can accept the check and then pays an agent, the account’s balance is reduced to $20, and you are charged the overdraft (O.D.) charge.
In any case, the amount charged by the bank will reduce the balance of the account.
NSF Fee Frequently Asked Questions
Why Do Banks Charge an NSF Fee?
Supposedly banks are charging NSF fees to offset the expense and inconvenience of having return checks that have been rejected. However, banks typically have to set an NSF fee to make money. “For many banks, NSF fees and overdraft fees are now the numbers. the top source of fee revenue and is one of the banks’ most profitable revenue sources,” a Woodstock Institute report stated by quoting the American Banker.6
Are NSF Fees Legal?
NSF costs are legal if they are on bounced checks, at the very least. They cannot be applied to credit card transactions and ATM withdrawals.
Overall, generally speaking, the U.S. government doesn’t regulate NSF fees or the number of payments. That’s to each financial institution. However, in the United States, the Truth in Lending Act requires banks to reveal the charges to their customers whenever they open accounts.
Can an NSF Fee Be Waived?
Bank policies differ and can be a bit different; however, an NSF cost can be removed after the fact, especially when it’s your only time or even the first time you’ve received one in a long time.
Contact the bank’s customer support phone number, and ask for a refund of a charge you’ve been charged. The sooner, the more favorable. Be sure to mention any limiting circumstances, for instance, the one-time delay that occurs in the regular direct deposit.
Be polite but persistent if a customer service rep isn’t or won’t assist your request to speak with an executive. If you can ask for it, you could ask for help in person at the local branch. However, you must inquire, as a few institutions have removed all fees as the policy of all institutions.
Do NSF Fees Affect Your Credit?
There’s no way to tell. NSF fees do not directly impact your credit score because the major credit bureaus (Equifax, TransUnion, and Experian) do not know about the fees. Checks returned because of insufficient funds don’t have to be reported individually to these bureaus.
However, a check that bounces could cause the credit or loan repayment to be overdue. The information will be reported to credit bureaus. If you make enough late payments and it can affect your score. A long string of bounced checks may hinder your ability to open new accounts with banks or pay a merchant an upcoming bill.
What Happens if I Don’t Pay My NSF Fees?
It’s not an alternative to pay NSF fees since the bank will automatically take these fees out of your bank account. If you’ve accrued enough fees to place your funds in black, the bank may close it after a certain period. Suppose your account has been overdrawn and the bank cannot pay it. In that case, they can confiscate any funds from other accounts linked to the intention of resolving it the repayment. Alternatively, you can make compensation using different methods.
The Bottom Line
The fees they incur are a source of frustration. However, they are a part of life in the financial world. While they’re becoming the subject of lawsuits and criticism, NSF fees remain legal. The best way to avoid them is by keeping track of their balances in banks, keeping the funds in their accounts, and signing in.