The content of this article is provided for informational purposes only. You should always obtain your own independent, tax, financial, and legal advice before making any material decision.
Key Takeaways
When money is tight, there may not always be enough cash in the bank to cover those expenses in full. When this happens, banks can charge customers a non-sufficient funds (NSF) fee or an overdraft fee.
Those fees can add up, putting strain on finances and making it harder to reach financial goals. And while they help banks recover funds for processing transactions that shouldn’t have been approved, they work in different ways.
Read on to learn the key differences between an NSF fee vs. overdraft fee, and for tips on how to navigate them effectively.
Table of contents
Banks charge overdraft fees when a debit card transaction or check exceeds the available funds in an account. While average overdraft fees hover around $26, banks may charge as much as $39.
Some financial institutions offer overdraft protection programs to cover these shortfalls, which could prevent the transaction from being declined. However, this service typically involves per-transaction fees.
Let's say a shopper heads to the grocery store to buy food for the week and uses their debit card to pay for the transaction. Their groceries cost $250, but they only have $220 in their checking account.
Since they used a debit card, the bank approved the transaction and effectively loaned them the money. But since the transaction cost $30 more than the person had in their account, the bank charges an overdraft fee of $12.
The shopper is responsible for the $30 the bank loaned them to approve the transaction as well as the $12 overdraft fee. This means the shopper could end up with an account balance of -$42 that they’ll need to repay.
Non-sufficient funds fees occur when a bank refuses a transaction due to insufficient funds in an individual's account. This fee can be charged by both the depositor's bank (for attempting the transaction) and the recipient's bank (for the failed payment).
NSF fees can vary between financial institutions, so it’s important to research each bank before opening an account.
Typically, NSF fees are reflected on account statements within a few days of the transaction attempt. It’s important to monitor account statements closely to understand the timing and impact of these fees.
Say a person has $700 in their bank account. They have rent due in a week and don’t get paid for another week and a half. The person writes a check for rent for $1,200, and their landlord deposits the check immediately.
Since they’re short $500 in their bank account, the bank will typically decline the transaction and may charge an NSF fee.
The bank won’t send the $700 in the person’s checking account to the landlord. However, they will charge a fee that the bank could deduct from the checking account automatically.
NSF fees and overdraft fees are similar, but they work in different ways. Banks charge NSF fees if an account doesn’t have enough money to cover the full cost of a transaction. Banks charge overdraft fees if a transaction goes through for a dollar amount that’s greater than the balance in the account.
Here’s a detailed breakdown of these fees:
| NSF fees | Overdraft fees | |
|---|---|---|
| Use case | Commonly charged by banks for bounced checks | Commonly charged by banks for debit card transactions |
| Responsibility | Banks may cancel the payment or transaction at their discretion | Transactions typically go through, but the account holder has to pay the fee to the bank |
| Average fees | Range between $10 and $50, depending on the financial institution | Vary by bank but can be as high as $39 |
NSF and overdraft fees don’t typically directly affect credit scores or credit history. People may not see their score drop if their bank charges them a fee. However, those fees can have an impact on a person’s credit score in some situations.
If account holders fail to pay overdraft or NSF fees on time and in full, the bank could report those unpaid fees to the three credit bureaus. This could show up as a derogatory mark on a credit report, potentially causing scores to drop by several points. If this happens repeatedly, it could make it harder for people to qualify for new loans and lines of credit.
The charges can add up if a person racks up multiple overdraft fees or NSF fees. Depending on their financial situation, the repeat fees could be hard to pay off. This increases the risk of the account holder going into debt and having that debt reported to the credit bureaus.
Even worse, the fees could make it harder for people to build their savings or work on improving their financial health.
Avoiding overdraft and NSF fees is possible. Here are a few steps to take to potentially avoid these fees.
Keeping a close eye on account balances can help prevent transactions that could lead to overdraft or NSF fees. Get in the habit of checking account balances at least once every other week and before making major purchases.
Many banks send notifications when an account balance falls under a certain threshold. Some debit cards also provide real-time spending alerts to help individuals prevent overspending and avoid bank fees.
The account holder typically sets the threshold based on their preferred spending limit. However, some banks may automatically send alerts if account balances get too close to the account’s required minimum amount.
Account holders can typically turn on alerts through their bank’s digital wallet app or online portal. If they can’t enable alerts, individuals may want to contact their bank’s customer service line for help.
Overdraft protection lets account holders avoid overdraft fees by pulling money into the checking account from a linked savings account. This prevents transactions from being declined, but it may come with fees of its own.
Each bank’s policies may differ. Some offer overdraft protection as a standard feature if account holders have a linked savings account at their institution.
Linking a checking account to a revolving credit card may help avoid NSF fees. If the account balance drops too low after a transaction, the bank can charge the difference to the linked credit card.
It’s a good idea to check credit card balances regularly to avoid going over the credit limit if a bank charges an NSF fee for a transaction. Going over the credit limit could carry additional fees and may cost cardholders more in interest.
Proactive money management — including active budgeting, automating transfers to cover shortfalls, and regularly reviewing statements — is key to preventing unnecessary overdraft and NSF fees. As long as people are careful and stay on top of their account activity, avoiding these fees should be easy.
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