Overdraft and non-sufficient funds (NSF) fees have a lot in common. Both fees are triggered when there’s not enough money in an account to cover a transaction, except with overdrafts, the transaction usually goes through and with NSF, it’s canceled.
Both of these bank fees can be avoided with a bit of focus and practice. Read on to learn the details.
What Are Overdraft Fees?
When a bank account balance is negative (meaning transactions exceed deposits), the account holder is often charged an overdraft fee. The transaction goes through, but the account holder owes the bank the cost of the transaction to bring the account back to zero, as well as the overdraft fee set by the bank.
Typically, overdraft fees will continue with each transaction until an account’s balance is out of the red. That means if an account holder is unaware of the overdraft and goes on using the card without making a deposit, they could be hit with a fee for each charge, no matter how small.
The average overdraft fee is currently $26, but it can be as high as $39, which can add up quickly when someone isn’t paying attention to their checking account balance. It’s worth noting that the government is considering capping these fees at a lower figure, which would benefit consumers.
How Do Overdraft Fees Work?
Overdraft policies vary from bank to bank, but typically they kick in when a debit card or checking account transaction exceeds the amount held in a bank account. There is usually a limit for how much overdraft is covered, say $50.
When the transaction goes through, the bank has a few choices:
• If the account holder has opted for a tool like overdraft protection, they may be shielded from overdraft fees up to a certain amount
• If the account is in good standing, or if the account holder has never over drafted before, the bank may choose to waive overdraft fees in this instance (or you might be able to request this and see if you can avoid overdraft fees).
• If the account holder has a history of over drafting, or is relatively new, the bank may choose to charge the overdraft fee.
When You Could Get Hit With an Overdraft Fee
It’s not just debit card purchases that can set off an overdraft fee. If the account holder doesn’t have enough cash in their checking account, any of the following transactions could lead to an overdraft fee:
• ATM withdrawals
• Checks
• Autopay bill payments or withdrawals
• Transfers between bank accounts
As mentioned above, once an account holder overdraws, the bank may continue to charge subsequent overdraft fees on the account until the balance is restored through a deposit.
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What Are NSF Fees?
On the surface, it’s hard to tell the difference between overdraft and NSF fees. Both fees occur when an account doesn’t have enough cash to cover a transaction.
However, an NSF fee is charged when an account doesn’t have enough money to cover a transaction and the transaction is canceled or rejected.
The average NSF fee is currently $20, but some banks may charge considerably higher.
How Do NSF Fees Work?
An account holder might trigger an NSF fee instead of an overdraft fee if they:
• Opt out of or never signed up for overdraft protection
• Already exceeded the bank or credit union’s overdraft protection limit
• Write a check that’s more than the balance of the account
When You Could Get Hit With an NSF Fee
NSF fee policies vary by banking institution, but an account holder is more likely to be charged in the following situations:
• Check writing. When someone writes a check for more than the account’s balance, the check bounces, and the transaction won’t go through. The account holder will be charged an NSF fee by their bank, and they may be charged an additional fee by the bank or entity that tried to cash the check.
• ACH payments. An ACH payment, or Automated Clearing House Network payment, can be an easy way to transfer money or pay someone, but if the transferring bank doesn’t cover ACH payments, the transaction could be canceled and the NSF fee charged.
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What Are the Differences Between Overdraft and NSF Fees?
NSF and overdraft fees are commonly lumped together as general bank fees, but they are not the same. Here’s the difference between overdraft and NSF fees:
| NSF Fee | Overdraft Fee | |
|---|---|---|
| Average Fee | $19 | $26 |
| Transaction goes through? | No | Yes |
| Charged repeatedly until corrected? | No | Yes |
| Can it be avoided through overdraft protection? | No | Yes |
Tips for Avoiding Overdraft and NSF Fees
Overdraft and NSF fees are frustrating for many people because they fall into the category of bank fees you should avoid — and you can easily do so with a few simple practices.
1. Setting Up Email and Text Alerts
Many banks and credit unions offer email and text bank alerts that account holders can set up to notify them of low balances. For example, an account holder could set up an alert when their checking account balance falls below a certain amount.
With enough notice, account holders have time to transfer money into the account to cover upcoming charges or auto-debits.
2. Utilizing Direct Deposit
Setting up direct deposit with an employer means paychecks go directly to a bank account on payday. It’s a nearly immediate payment, opposed to waiting for a check by mail then depositing it at the bank. This could save someone from overdraft fees, especially if paychecks and major bills occur at regular intervals.
3. Having a Savings Cushion to Prevent Overdraft
Keeping a healthy cash cushion in a checking account can prevent it from dropping dangerously low. While it’s not best practice to keep tons of extra cash in a checking account (as these accounts often have low or no interest), keeping a few hundred extra in the account could keep someone from overdrafts when they need to make a transfer or forget about a check they wrote.
4. Checking Finances Regularly
While automation can help, nothing beats a regular check-in for managing your bank account. Consider reviewing account balances at least once a week. It can help you keep those numbers in mind when a large transaction or purchase comes up.
Recommended: Is Overdraft Protection Worth It?
5. Utilizing a Budgeting App
Keeping a budget is an important part of financial wellness. Not only does it involve knowing the balance of bank accounts, but it can also prevent people from over- or unnecessary spending that sends an account into overdraft. Some budgeting apps come with alerts to notify users when account balances are low. One good resource: Your financial institution. See what it offers.
The Takeaway
Both overdraft and non-sufficient funds (NSF) fees occur when your bank balance drops below zero into negative territory. The key difference is that with overdraft fees, the transaction is typically completed, while with NSF fees, the transaction is usually rejected.
You might look for a bank which doesn’t charge overdraft fees up to a limit to minimize the impact of these charges and take steps to always keep your account with a positive balance.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
What is the difference between overdraft and non-sufficient funds fees?
The difference between overdraft and NSF fees is the success or failure of the transactions. Overdrafting will allow the debit to clear. With an NSF, the transaction does not go through.
Is an overdraft fee or an NSF fee more expensive?
Currently, NSF fees average around $19, while overdraft charges are about $26.
How can you avoid overdraft and NSF fees?
You can avoid overdraft and NSF fees by keeping a close eye on bank account balances and choosing a bank that offers overdraft protection or forgiveness.
Photo credit: iStock/Ivan Pantic
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