Non-sufficient fund (NSF) or insufficient fund means the chequing account does not have enough money to cover all transactions. NSF fee is the fee charged when a cheque that is presented cannot cover the balance in the account. To avoid NSF fees, monitor your account and limit your expenses.
Non-sufficient funds (NSF) fees can cost a lot and can decrease the account holder’s creditworthiness. NSF or insufficient fund refers to the status of a chequing account that happens when attempting to withdraw more money than the account holds.
Usually, these NSF cheques are known as bounced or bad cheques. If a bank receives a cheque with an account that has insufficient funds, the bank may refuse the payment. It will proceed to charge the account holder an NSF fee. A penalty or fee may be charged by the merchant for the bounced cheque.
This fee is charged by banks and credit unions when a cheque or other transaction is returned unpaid because of insufficient funds to cover that expense.
NSF fees are usually fixed amounts and consumers are already paying extraordinarily high-interest rates for small errors in their accounts. NSF fees average $34 each, according to the 2022 data of the Consumer Financial Protection Bureau.
If you plan to rectify the solution, you can deposit more money into the chequing account and issue a new cheque. Here are some examples of when a financial institution might charge you an NSF fee:
NSF cheques – The most common cause of charging an NSF fee is due to bounced cheque. This may not be the only fee you face with a returned cheque. The payee or merchant may also charge a separate returned cheque fee. If the returned cheque causes you to miss your payment due date, you may end up having to pay costly late fees, too.
Fraudulent cheques – There are chances that someone issues a cheque in your name, and it turns out to be fraudulent. If the cheque turns out to be fraudulent, the bank may charge you a fee and pull those funds back out of your account. If you don’t have enough funds to cover pending transactions, you could face more fees on those transactions. If you deposit a bad cheque, and the bank found out, it reverses the deposit and potentially charges you with NSF fees.
Debit card transactions – Financial institutions typically don’t charge NSF fees for debit card transactions that get declined due to insufficient funds. However, if you’ve opted for overdraft protection through your bank, you may get charged with an overdraft penalty.
Overdraft and NSF fees may look the same but carry differences
NSF and overdraft fees are two different things, though both represent a shortfall of funds and can trigger fees.
Some banks and credit unions combine NSF fees with overdraft fees but the primary difference between the two is how your financial institution handles the transaction. If they decline the transaction because there aren’t any funds to cover it, then it is considered an NSF and if the bank covers the transaction even after you are short of funds, then it may charge you an overdraft fee.
Consequences of NSF funds
Different penalties- If a cheque gets bounced due to low funds, the bank charges a fee to both the defaulter and the payee. If the bounced cheque is against the repayment of any type of loan, then the defaulter needs to pay extra late payment fees for the same.
Your credit score is impacted. The major impact that a bounced cheque carries is that you lose your creditworthiness, and it hampers your financial credit history. Due to this, financial institutions might not lend you, if you carry a bad credit score.
Legal actions- If a cheque bounces and the defaulter doesn’t make the necessary payments within the stipulated period, then he/she can be prosecuted under existing criminal law.
Ways to avoid NSF fees
NSF fees can decrease your creditworthiness, if you are not careful enough. You can follow these steps to keep your account intact and avoid any kind of fees:
First, monitor your chequing account balance. Review your account balance continuously to know your available funds and schedule your payments accordingly.
Many banks allow you to set up low-balance alerts where you get a text or email notification when the funds in the account drop below the amount you decided.
Second, link your chequing and savings account. Your money will be automatically transferred from savings to chequing account if you don’t carry sufficient balances in your chequing account to cover your transactions. However, you might be charged a transfer fee but it's usually less than what you would pay for an NSF fee.
Third, maintain a financial cushion. You can always keep some extra cash in your chequing account to manage unexpected expenses. This will also help you pay for the bills that you forgot to calculate.