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Many of us stretch our budgets from one paycheck to another. Unfortunately, sometimes we stretch our finances so much that a bank or credit union charges overdraft fees or NSF fees (insufficient funds).
While many people may think these fees are the same, they are not. In an overdraft scenario, your transaction is completed despite exceeding the amount of money you have in your account. This usually results in an overdraft fee. In the case of an NSF, a financial institution typically rejects the transaction and may charge a fee. One thing in common with overdraft and NSF fees is that they happen when you run out of money in your account.
Fortunately, a bank or credit union cannot charge both an overdraft fee and an NSF fee for the same transaction.
If you’ve ever been hit by overdraft or bounced charges, you know how much it can sting. The average overdraft or NSF fee is around $ 30, according to the Consumer Financial Protection Bureau. According to Forbes Advisor’s 2020 Current Account Fee Survey, the average overdraft fee was $ 24.38.
If you’ve never been affected by any of these charges, consider yourself a wise consumer. To avoid overdraft fees or NSF fees, or to continue to avoid one, it helps to engage in smart money management practices.
Overdraft fees vs NSF fees
If you have overdraft protection, a financial institution will usually cover a transaction even if the transaction would push your account into negative territory. In this case, the bank or credit union may charge an overdraft fee.
In contrast, a financial institution often charges bounced charges when your account is overdrawn, but you lack overdraft protection. In this situation, the bank or credit union usually won’t cover the transaction if they would send your balance below zero, and NSF fees can cost you dearly.
Overdraft fees come into play when you don’t have enough money in an account to cover various types of transactions, such as online bill payment.
Whether you, the customer, can spend more money than you have in your account is up to a bank or a credit union. In choosing whether or not to activate the overdraft switch, the financial institution may take into account factors such as your length of time as a customer, the frequency of your deposits, and your overdraft history.
You must be enrolled in a financial institution’s overdraft protection program to take advantage of it. However, banks and credit unions are not required to offer these programs. Some banks charge a fee for this service, while others provide it for free.
What triggers the overdraft fee?
The types of transactions that can trigger an overdraft fee if you don’t have enough money in your account can include:
- Automatic bill payments
- ATM withdrawals
- Debit card purchases
- Cash transfers
Many financial institutions charge a fixed amount for overdraft fees, although some neobanks do not charge overdraft fees at all, and several large banks are starting to rethink overdraft fees. Federal laws do not place any limit on the amount of overdraft fees from banks or credit unions. However, some financial institutions limit the number of fees that can be charged per day. However, additional fees may be charged if your account remains overdrawn for a certain number of days.
Examples of overdraft fees
The most common type of overdraft fee comes from a bank or credit union’s opt-in overdraft program. In this program, a financial institution pays for certain overdraft transactions and charges a fee.
You may also be affected by fees if you link your checking account to another account, such as a savings account. When an overdraft occurs, the bank or credit union takes money from the linked account and puts it in your checking account to cover a transaction. You often end up paying a small fee for this service.
However, additional charges may be deducted from your checking account if an overdraft transaction is paid by a credit card connected to your account. Similar fees may be charged if a financial institution uses an overdraft line of credit that you have established to cover overdraft transactions. While these fees are usually lower than traditional overdraft fees, keep in mind that the interest charged for credit options can end up costing you even more. To avoid interest charges, pay off the entire credit balance before your next monthly statement arrives.
A financial institution charges insufficient funds fees when your checking account does not have enough money to cover a purchase, transfer, or withdrawal, and the bank or credit union refuses to cover that amount. NSF fees may be imposed when you opt out of overdraft protection, exceed the bank or credit union’s limit for overdraft protection, or write a check that exceeds the amount of money in your account.
When the dollar amount of the check exceeds your account balance, it “bounces”, meaning the check is returned to the financial institution without that money being withdrawn from your account. This may result in charges to NSF, also known as returned item charges or insufficient funds charges.
What triggers the NSF charges?
Situations in which you may incur an NSF include:
- Write a bad check. This means that there was not enough money in your account to cover the amount of the check. In addition to the NSF fee charged by the bank or credit union, the merchant who accepted the check may charge a returned check fee.
- Make an ACH electronic payment that your bank or credit union does not cover. ACH refers to the automated clearing house network.
- Make a purchase with a debit card. A financial institution may charge an NSF fee if it rejects a debit card transaction that exceeds the amount available in your bank account. However, NSF fees for debit card transactions are not common.
Federal laws do not limit the dollar amount of NSF fees.
Examples of NSF fees
You may be affected by an NSF charge if you write an NSF check. Say, for example, you write your handyman a check for $ 150 for work he has done on your house. But when your handyman tries to cash the check, it bounces because you only have $ 25 in your account and you’ve chosen overdraft protection. In addition, your handyman may also incur bank charges.
Sometimes your payment may be rejected resulting in an insufficient funds notice. For example, let’s say you take the $ 40 bill for dinner. You hand your debit card to the server, but your checking account is only $ 5. If you don’t have overdraft protection, the transaction will be declined because it exceeds the amount of money in your account. Depending on your bank or credit union, you may or may not be charged an NSF fee.
How to Avoid Overdraft Fees and NSF
Overdraft and NSF fees don’t have to be the norm. Several tools are at your disposal to avoid them:
- Stay on top of your finances. Make sure you keep a close watch on your balances, deposits, transactions, withdrawals, and automatic payments. This is to make sure that you always have enough money in your account to cover each transaction. This tracking may include setting up email or text alerts, such as those notifying you when your balance has fallen below a certain amount. Or, you can turn to a budgeting app so you can keep a close eye on your money. Keep in mind any automatic transactions that occur on a regular basis, such as every month, as they might not show up in a real-time view of your account.
- Maintain a cash cushion. Keep a certain amount of money in your checking account at all times to avoid overdraft fees. Maintaining excess money in your checking account should help you avoid overdraft and NSF charges.
- Sign up for direct deposit. When you allow your employer to deposit your paycheck directly, you can dip into that money as soon as it arrives in your account rather than waiting for a paper check to clear the bank.
- Act fast. If you find that your account is overdrawn, quickly deposit enough money to cover the shortfall and contact your bank. If you do this, you may be able to avoid overdraft or NSF fees. Some banks give you a short grace period to settle an overdraft without financial penalty.
- Log in to another account. Linking your checking account to another account or to a credit card or line of credit can help you avoid overdraft and NSF charges. If you have a checking account and a savings account at the same financial institution, you may be able to avoid finding yourself in a financial hole by electronically connecting the two accounts. You may or may not allow your bank or credit union to transfer money from your savings account to your checking account when pending transactions would drop your checking balance below zero.
- Configure alerts. We can all slip up from time to time. So, to avoid an overdraft or NSF, you should consider enabling email or text alerts that let you know when your account balance drops below a certain amount.
- Find another bank. If you’re not happy with the way your current financial institution handles overdrafts or bad charges, you might consider taking your money to another bank or credit union. Some online banks allow you to overdraft up to a certain amount of money, for example $ 50 or $ 100, without paying a fee.
You can keep as much money as possible by avoiding overdraft fees and bounced charges. If you’re not careful, these fees can drain hundreds of dollars a year from your account. Fortunately, there are several ways to keep enough money in your checking account.