Non-sufficient fund fees, more commonly known as NSF fees, are charged when your checking account does not have enough money for a purchase or payment you try to make. This purchase or payment could be with a debit card or a check, and rather than allowing the purchase to go through; the financial institution will reject it and charge you a fee. This is also known as a returned item fee.
Overdraft fees are similar, but they occur when the financial institution allows a transaction to go through, despite your account balance not being sufficient to cover it. It is like an emergency short-term loan, and it comes at a cost. You will be charged an overdraft fee, plus you have to pay the deficit balance. Overdraft fees and the deficit balance are taken out of the first deposit you make after the overdraft occurs.
Both types of fees can be costly, coming in as high as $35 each. These charges can add up, especially if you overdraft your account frequently. Also, consider that when your account has a low balance is probably the worst time for you to have to pay an unexpected fee. That is why it is so important to understand what you can do to avoid these situations.
Best practices to avoid NSF and overdraft fees
- Use direct deposit if your employer offers it as a way of getting your paychecks into your checking account faster. That way, you are less likely to be in a situation where you overdraft your account because you have not had time to deposit your paycheck yet.
- Keep track of the balance in your checking account. It may seem old-fashioned to keep a checkbook register, but this is the best way for you to know exactly how much money you have available at any given time. It can take several days for electronic bill pay withdrawals to go through, and even longer for paper checks to clear. Note them in your checkbook register, along with ATM withdrawals and debit card transactions. Then check your balance before making a purchase or writing a check to ensure you have enough money to cover it.
- Opt out of courtesy overdraft protection and instead have your financial institution link your checking account to a savings account. Then rather than paying the difference and charging you a hefty fee, they will transfer money from your savings account to your checking account to cover the purchase and charge you a smaller fee.
- Do not use your debit card to rent a car, buy gas, or check into a hotel. Each of these merchants will often place a hold on your account for an amount far larger than you actually end up spending. The hold may cause you to overdraw your account accidentally because you were not aware that the money on hold was unavailable to spend.
- Keep a buffer in your checking account all the time. Even just keeping a minimum $100 account balance will prevent you from triggering an overdraft when you spend a little more than you planned. Just be sure to think of the last $100 as unavailable. Quickly deposit money to get back up to $100 if your balance drops below that amount.
- Set up an alert so your bank will notify you if your checking account balance falls below a specified amount. If you receive the notifications on your phone, you can instantly adjust your spending to avoid making an overdraft on your account and incurring a fee.
- Carefully manage joint accounts and consider separate accounts if you cannot coordinate your spending habits. If one of you is making purchases the other does not know about, this could easily lead to triggering an overdraft. Unless you can agree on how to track your purchases and maintain clear communication about the joint account balance and scheduled payments, you may be better off with separate accounts.
- If you do trigger an overdraft, deposit money into your account as soon as possible to pay the fee and get a positive balance again. Some financial institutions may charge you an additional fee for each day your balance is negative, or another large fee if your account has a negative balance for several days in a row after an overdraft. Read your account's fee schedule carefully, often credit union's charger lower fees because they are member-owned and are not-for-profit.