Banking 101: What are Overdraft and NSF Fees?

You may have heard the term “overdraft fee” and “NSF fee” used interchangeably when referring to a charge being applied to a bank account with a negative balance.  Many people think these two terms are one and the same, but in fact, they are different. The common element to both fees is that there is not enough money in an account to cover a transaction.

When a payment is presented against a checking account and the account balance isn’t enough to cover the payment, the financial institution has two options. It could reject the payment for non-sufficient funds (NSF), meaning the bill or purchase is not paid, and the resulting NSF fee is charged. Or, the financial institution could process the full amount of the payment, making a temporary loan to cover the difference between the account balance and the payment total, and charge the customer an overdraft fee for doing so.

Overdraft and NSF fees vary by financial institution. There are no federal limits on how much banks or credit unions can charge for overdraft and NSF fees, but some financial institutions limit the number of fees that can be charged per day. If the account remains overdrawn for a certain number of days, additional fees may be charged. It’s possible that if the account is not brought above a zero balance, the bank could close the account and transfer the unpaid balance to a collection agency.

How Overdraft and NSF Fees Happen

As an example, if a customer makes a payment by check or Automated Clearing House (ACH) from their account for $150 but the balance in the account is only $125, the balance is short by $25.

The bank the payment is made from could reject the $150 payment for non-sufficient funds, return the payment to the merchant, and charge the NSF fee to the account. The payment is said to have bounced. The merchant that accepted the check might also charge the customer with a returned check fee to cover their own bank’s fees for uncollected funds.

Instead of rejecting the payment, the bank could process the payment for the full amount which creates a negative balance in the customer’s account. When the account balance becomes negative, the account is said to be overdrawn. The bank has made a temporary loan for the shortage, called an overdraft, and charges an overdraft fee. In such a scenario, the customer is responsible for repaying the amount of the overdraft plus the fee for covering the payment shortage.

Transactions that could result in an account overdraft situation include:

• Automatic bill or subscription payments
• Payments or purchases made by a paper check
• ATM withdrawals
• Debit card purchases or payments

It’s possible the overdraft fee could be larger than the amount of the shortage that the financial institution covered. If multiple overdrafts hit the account in a day, multiple (or per item) overdraft fees could be charged.

To correct an overdraft situation, money must be added to the account to cover both the overdraft amount and any fees. Otherwise, the balance owed will be subtracted from the next deposit.

How to Avoid Overdraft and NSF Fees

Overdraft fees and NSF fees can become expensive and stressful, and a declined debit transaction or bounced check could cause embarrassment at the time a transaction is occurring.  However, with some proper planning and preventative measures, there are ways to avoid such situations.

In addition to tracking your expenses and making sure you understand your financial institution’s overdraft policy, there are steps you can take to help avoid overdrafts, non-sufficient funds situations, and the associated fees.

• Sign up for online banking. With online banking you can check your balances and track your account activity closely from your PC, laptop, or tablet whenever you want.
• Sign up for mobile banking. Your bank’s mobile app could allow you to quickly transfer money into your checking account from a linked account at a moment’s notice to cover a purchase and prevent an overdraft.
• Sign up for account alerts. Alerts can be set for your account to notify you when the balance falls below a certain amount. That way, you can be more careful with spending or arrange for a deposit to avoid an overdraft. Alerts can be chosen to notify you when transactions flow out of or into your account.
• Ask about overdraft protection. Overdraft protection is an arrangement with the financial institution that often uses linked accounts. With account linking, in the case of an overdraft, money is automatically transferred to cover a shortage in the account from another account you hold at the bank, (such as a savings account). There may be a fee for using overdraft protection, but it might be smaller than an overdraft fee or NSF fee. Fees and other details should be outlined in the Overdraft Protection agreement.
• Monitor your balance and act fast. Check your balance frequently and if you see that your account has gone into overdraft status, deposit enough money to make up the deficit quickly and contact your bank right away. If you do this, you may be able to avoid an overdraft or NSF fee. Some banks allow a short grace period to take care of an overdraft without a financial penalty.
• Keep a cushion in the account. If possible, keep a little extra money in your account to cover forgotten or unexpected charges to help prevent accidentally overdrawing the account.

To learn about products and services offered by Enterprise Bank including checking accounts, please visit https://www.enterprisebanking.com. If you would like to speak to an Enterprise Banker about opening an account, we invite you to call us at 877-671-2265 or visit one of our convenient branch locations.