Overdraft Fees vs. Nonsufficient Funds Fees: What’s the Difference?
As a consumer, it’s easy to get confused thinking that overdraft fees and nonsufficient funds (NSF) fees are the same – however, they are actually distinctly different. Understanding the discrepancies between the two can save you a lot of hassle, head-scratching, and money when it comes to managing your finances. In this article, we will explain the main differences between overdraft fees and nonsufficient funds (NSF) fees, as well as offer strategies to avoid both.
What Is an Overdraft Fee?
Simply put, an overdraft fee is a fee charged when you overdraw from your checking account. Overdraft fees are assessed on the transactions that cause your account balance to exceed the available balance in your account. This can create quite a financial pinch for people who rely on extremely low account balances to budget their monthly expenses. When an account balance is not enough to cover a payment or purchase, the account is overdrawn, and an overdraft fee is assessed.
Examples of Transactions Resulting in Overdraft Fees
The most common and obvious overdraft fee culprits are ATM withdrawals and point-of-sale (POS) purchases. Most consumers are informed that cash withdrawals and purchases will cause their balances to decrease, creating the very real possibility of overdrawing from the account.
Other, less readily apparent circumstances can cause overdrafts as well. Most people don’t realize (or simply forget) that basic banking services, such as a stop payment, check printing fees, or other fees, will cause an overdraft if there is not enough money in the account to cover the fees. Additionally, if there are insufficient funds in the account, automatic transfers or payments (i.e., directed from a third-party provider) can create an overdraft.
The Cost of Overdraft Fees
Each time an overdraft occurs, a fee is assessed. The exact amount of the fee varies depending on the financial institution; however, it can range anywhere between $25-$40 per overdraft. These fees are more costly than most late payment fees and accrued interest charges, making them even more inconvenient if they occur.
What Is an Nonsufficient Funds Fee?
A nonsufficient funds (NSF) fee is charged when there are “insufficient funds” in the account. In other words, when a customer makes a purchase or payment and their account balance does not have enough money to cover the cost, their transaction will get rejected and an NSF fee will be assessed.
The Cost of Nonsufficient Funds Fees
NSF fees can range from $ 25-$35, depending on the bank. NSF fees may also include a return check fee or late fee in the case of an overdue bill, or a check issued to a vendor.
How to Avoid Overdraft and NSF Fees
There are several different strategies to avoid overdraft fees and NSF fees. These tips will not just save you money but will also protect your good credit.
Monitor Your Account
One of the best ways to eliminate the possibility of either type of fee is to monitor your account regularly and make sure your account balance remains high enough to cover both the planned and unplanned expenses. Utilizing online banking services and mobile banking applications is a great way to easily keep tabs on your account balance.
Set Up Overdraft Protection
Some banking institutions offer overdraft protection plans. These lines of protection are linked to another checking or savings account, credit card, or line of credit. With overdraft protection, if someone spends more than their available balance, the difference is taken from the linked account. This allows customers to avoid the fees associated with overdrafts.
Contact the Financial Institution
If there is a question as to whether or not a transaction or purchase will result in an overdraft or NSF fee, it’s best to contact the financial institution directly. Most banks are willing to work with customers to avoid those fees or set up a payment plan.
Choose Direct Deposit
Direct deposits are a great way to ensure that the money you need is available when it’s needed. Knowing that your paycheck has been deposited into your account before the day of your payments allows for better financial planning and prevents unexpected overdrafts or NSF fees.
Avoiding overdraft and NSF fees has more benefits than just saving money. Not only are they inconvenient, they can also hurt your credit score. Knowing the differences between overdraft and NSF fees, expecting the unexpected, and staying vigilant in monitoring your account can save you aggravation, stress, and money in the long run.
