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When you make a payment without enough money in your checking account, one of two things can happen: Either your bank covers the payment, or it doesn’t.
Neither scenario is good, and both will result in fees. But the second situation is known as “bouncing” a payment, and it could lead to other third-party charges as well as your bank’s nonsufficient funds fee.
NSF fees cost Americans billions of dollars every year, according to a study of FDIC data from the Center for Responsible Lending. But you can avoid them if you know how.
- What is a nonsufficient funds (NSF) fee?
- How much are NSF fees?
- When might I get charged an NSF fee?
- What’s the difference between an NSF fee and an overdraft fee?
- Next steps: How to avoid NSF fees
What is a nonsufficient funds (NSF) fee?
The fee your financial institution charges when you bounce a payment is called a nonsufficient funds, or NSF, fee. You may also get hit with an NSF fee if you try to deposit or cash a check and the issuer doesn’t have enough money in their account to pay for it. And there are some other situations in which you might encounter an NSF fee — we’ll get into that a bit later.
Bounced payments and NSF fees can cost you in more ways than one.
If your payment doesn’t get processed, the payee — the person or business that was supposed to get paid — may charge a returned-check fee on top of the NSF fee your bank charges you. You could also face late fees or service cancellations, and your account may be turned over to a collection agency if you don’t resolve the situation.
Plus, if you miss a payment on an account that gets reported to the credit bureaus, it could negatively affect your credit.
NSF fees are different from overdraft fees, which we’ll discuss in more detail later.
Are NSF fees legal?
Yes. Banks and credit unions may charge a fee if there are insufficient funds to cover a transaction. Each financial institution determines its fees — and while the federal government doesn’t limit fee amounts, states do typically limit the maximum amount financial institutions can assess.
The Truth in Savings Act requires all banks and credit unions to give you a fee schedule — outlining and explaining all fees — when you open your account. It’s important to review it and your account agreement carefully so that you understand the potential charges you could face.
Are NSF fees refundable?
Banks don’t have to waive or refund NSF fees. But it doesn’t hurt to ask if your financial institution will refund an NSF fee — the bank may be willing to work with you. Some institutions even have programs in place that waive fees if you meet certain conditions.
How much are NSF fees?
In the U.S., the average fee for overdrawing an account is around $30, according to the FDIC. But fees can range from about $10 to nearly $40, depending on your bank and its policies.
Financial institutions aren’t required to notify you when a check bounces because of insufficient funds, so NSF fees can add up before you know it. You may incur multiple fees from one miscalculation of your checking account balance and not even be aware of them until you get your statement.
Here’s a scenario for how NSF fees can add up.
You think you have $300 in your checking account (though you’re not exactly sure). But you’re also expecting a deposit to hit pretty soon, so you go ahead and write some checks: for $10, $65, $185 and $350, in that order. What can go wrong?
- Misstep 1. By miscalculating the amount available in your account, you’re already putting your account in danger of being overdrawn. You can avoid this in the future by always looking at the available balance on your account statement or in your online account before making payments.
- Misstep 2. You wrote checks totaling more than what you thought you had in the account. Writing checks for more than what you currently have in your account is never a good idea — and let’s say in this scenario that the deposit you were expecting was just slightly delayed (even the most dependable deposits can hit later than expected sometimes).
- Misstep 3. You figured the bank would pay the checks in the order you made them out. But your bank can post payments to your account in any order that’s consistent with its disclosed practices. Imagine that the bank posts the $350 check first.
The result? Your account is immediately overdrawn for the $350 payment — and the other three checks after it. That means you could end up with an NSF fee for all four payments. If your bank charges an NSF fee of $35, you could owe up to $140 in fees.
That’s a heavy price to pay — and it’s not even counting any potential penalties from the recipient of the bounced check.
When might I get charged an NSF fee?
It’s easy to understand the circumstances that might cause a check to bounce and lead to an NSF fee. But what about when the fee will hit your account?
Nonsufficient funds checks
When someone deposits a check you’ve written, their financial institution generally must act to make the funds available to them no longer than two business days after they make the deposit (although there can be exceptions).
Your bank will likely know right away if you don’t have enough funds in your account to cover that check — which could mean the fees show up in your account not long after your payee tries (unsuccessfully) to cash or deposit it.
It can take weeks for a bank to detect and bounce a fraudulent check. So if you deposit a bad check someone else gives you, it could be a while before the bank figures it out, reverses the deposit and potentially charges you any NSF fees.
Debit card transactions
If your debit card transaction gets declined, you typically won’t see any NSF fee. Generally, banks can’t charge NSF fees for debit card transactions that get declined because of insufficient funds.
What’s the difference between an NSF fee and an overdraft fee?
Banks and credit unions charge NSF fees on checks and electronic payments that don’t get processed because of insufficient funds, which means the payee doesn’t receive their money.
But many financial institutions have overdraft protection programs, which will cover transactions even if you don’t have enough money in your account to pay for them. The bank charges an overdraft fee, but your payment gets processed.
In general, many banks provide overdraft protection automatically to cover checks or electronic ACH payments. But to receive overdraft protection for debit card transactions, you need to opt in. If you don’t, and there isn’t enough money in your account to cover a transaction, it will be denied.
Banks usually charge the same amount for overdraft and insufficient funds fees.
Next steps: How to avoid NSF fees
NSF fees can cost you a bundle if you’re not careful. Here are a few tips to help you avoid them.
- Track your expenses. Be sure to record all debits from your account — including written checks, electronic transfers, debit card transactions and ATM withdrawals — in your check register.
- Monitor your checking account balance. Review your account balance regularly so you know how much is available. Remember, your balance may not reflect every check you’ve written or electronic transaction you’ve scheduled. Even if your bank includes pending transactions in your available balance, it can’t include transactions it doesn’t know about, such as the check you wrote for your niece’s graduation gift that she hasn’t cashed yet.
- Link your checking and savings accounts. When you link your accounts, money will automatically be transferred from savings to checking if you don’t have enough in your checking account to cover a transaction. You’ll probably be charged a transfer fee, but it’s usually less than what you’d pay for an NSF fee.
- Maintain a financial cushion. Keep some extra cash in your checking account beyond what you need to pay your bills every month. This will give you some wiggle room if you forget to record a withdrawal or miscalculate your balance.
- Set up low balance alerts. Some banks allow you to receive notifications when your account balance is getting low, so you’ll know to stop making withdrawals or transfer money into the account.