What are The Difference between Overdraft Fees and NSF Fees?

Anyone who has spent more than what’s available in their checking account may have encountered either an overdraft fee or a nonsufficient funds (NSF) fee. While these terms are often thought to be interchangeable, there are important distinctions between them.

Let’s explore the key differences between overdraft and NSF fees and discuss strategies to avoid them.

What is an overdraft fee?

An overdraft fee is typically charged by a bank when it permits transactions that would otherwise exceed your account balance. Essentially, it’s like a short-term loan from the bank, where you’re expected to repay both the covered amount and the overdraft fee.

While overdraft fees can be substantial, some people prefer them to the inconvenience or embarrassment of having a check bounce or debit transactions declined.

How much do overdraft fees cost?

In 2023, the average overdraft fee was $26.61, according to Bankrate’s study on checking and ATM fees, which represents an 11% decrease from $29.80 the previous year. Despite the overall decline in overdraft fees, 91% of the checking accounts surveyed by Bankrate still incurred these fees last year.

Many banks set limits on the number of overdraft fees they will charge in a single day. For instance, a bank might cap the fees at three per day. If four transactions are processed on an overdrawn account within the same day, the customer will only be charged for a maximum of three overdraft fees.

Example of an overdraft fee

Imagine your account balance is $75, and you make a $100 debit card transaction for an unexpected expense, like a car repair. The bank might cover the additional $25 and approve the transaction. As a result, you’ll be charged the bank’s standard overdraft fee—let’s say $30—and you’ll need to repay the $25 that overdrawn your account.

What is an NSF fee?

An NSF fee is typically charged by banks when there are insufficient funds in an account to cover a transaction, and the bank declines to process it. This can result in bounced checks or rejected electronic bill payments.

How much do NSF fees cost?

Last year, the average NSF fee was $19.94, marking a 25% decrease from the previous year, according to the 2023 checking account and ATM fee study.

Although NSF fees are generally decreasing, they are still frequently imposed. The survey found that 70% of accounts continue to charge these fees.

Example of an NSF fee

For example, if you write a check for $600 to your landlord but only have $500 in your checking account, the bank will not process the check and will charge you an NSF fee.

NSF fees can also apply to electronic payments. For instance, if your monthly $100 car insurance payment is due but you only have $50 in your account on the payment date, the bank may decline the transaction and impose an NSF fee.

In addition to the NSF fee from the bank, bounced checks and rejected electronic payments can lead to additional fees, such as returned check fees, late fees, or interest charges from the service provider or credit card company you were trying to pay.

Overdraft fees vs. NSF fees

The following chart compares overdraft fees and NSF fees, detailing the conditions under which banks may charge them:

Ways to avoid overdraft and NSF fees

• Overdraft Protection: Overdraft protection is a bank service that automatically transfers funds from a linked savings account when your checking account balance is insufficient to cover transactions like debit purchases, checks, or electronic payments. These transfers ensure that transactions go through (as long as there are enough funds in the linked account) and help you avoid overdraft or NSF fees. However, some banks may charge a fee for overdraft protection transfers.
• Opting Out of Overdrafts: If you choose to opt out of overdraft protection, the bank will deny any transactions that would cause your account to go negative, and you won’t incur overdraft fees. However, this means that transactions may be declined if there aren’t sufficient funds.
• Account Monitoring: Regularly monitoring your account balance helps prevent initiating transactions that exceed your available funds. Additionally, setting up low-balance alerts with your bank can be a useful tool to keep track of your balance.
• Finding a Bank with No Fees: Some banks do not charge overdraft or NSF fees. Banks that have eliminated these fees or offer alternative options include Ally Bank, Bank of America, Capital One, Citibank, PNC Bank, U.S. Bank, and Wells Fargo.
• Grace Period: Some banks provide a grace period—typically around 24 hours—allowing you to correct a negative balance before assessing overdraft fees.

How an overdrawn account can affect your credit

If a customer fails to deposit funds into an overdrawn account to cover the negative balance and any associated fees, the bank may eventually send the account to a collection agency, according to Experian. This can result in the account appearing on your credit report.

To prevent an overdrawn checking account from negatively affecting your credit score, it’s crucial to address the negative balance promptly. Contacting a customer service representative can help clarify the bank’s policy and guide you on the best steps to resolve the issue.

How much banks earn in overdraft and NSF fees

Although overdraft and NSF fees are generally declining, they still contribute significantly to bank revenues. In 2023, banks with assets over $1 billion generated $5.83 billion from these fees, according to the Consumer Financial Protection Bureau (CFPB).

The CFPB has urged banks to reduce these fees, labeling them as “junk fees” that can strain Americans’ finances.

In Conclusion

Overdraft fees and NSF fees are charged by banks in different situations: overdraft fees apply when transactions are processed despite insufficient funds, while NSF fees are imposed when transactions are denied due to a lack of funds. Both types of fees can be substantial, so understanding how to avoid them is crucial for managing your finances effectively.