Overdraft and Non-Sufficient Funds (NSF) Fees

Overdraft protection is a service offered by most banks, credit unions, and other financial institutions as part of their checking or savings account agreement with you.  With overdraft protection, if you write a check or use your debit card or ATM card for a purchase or quick cash, but don’t have enough funds in your account to cover the transaction, your financial institution will allow the transaction to clear. However, this protection usually comes high fees of up to $38 per incident are common.

If you sign up for overdraft protection, your financial institution will link your checking account to your savings account, a credit card, or an overdraft line of credit, as a backup source of funds to cover any shortage in your checking account.

The good news about overdraft protection is that if you don’t have enough money in your checking account, your check will clear or your debit card transaction will go through.  The bad news is, your financial institution will likely charge you an overdraft fee to make the transfer, even though you’re using your own money to cover the shortage. If your backup source of funds is an overdraft line of credit, you’ll likely pay interest on the amount used until you pay it back.  Keep in mind, if you don’t have enough overdraft protection available to cover a shortage, your transactions won’t clear.    

Prior to 2010, many financial institutions automatically enrolled their customers in overdraft protection programs. Often you had to opt out or say “no” to end the coverage. Now, if you want overdraft protection for non-routine debit and ATM transactions, you must opt in or say “yes” to the program. This means you won’t incur overdraft fees on certain transactions, unless you’ve chosen to do so.  However, you can still incur overdraft fees on checks and for automatic bill payment services when you overdraw your account. The new federal rules don’t apply to these services. If you don’t want overdraft protection, talk to your financial institution.

A significant amount of banks’ revenue comes from overdraft fees on consumer checking accounts; therefore, financial institutions are in no hurry to eliminate them. Many financial institutions also use a practice called "reordering," where the checks bearing the largest amounts are processed first, instead of the order in which they are received. This check-clearing process allows financial institutions to maximize overdraft fees.

Without overdraft protection for checks and automatic bill payments, your financial institution can still charge you a non-sufficient funds (NSF) fee if not enough money is available in your account to cover the transaction. The amount of this fee is often comparable to an overdraft fee. Additionally, the party receiving your check can charge you a “Add to Glossary” return item fee (also similar to an overdraft fee), and may report you to a check verification service or consumer credit reporting agency. Too many negative reports may result in companies or merchants refusing to accept your checks, and financial institutions restricting your ability to open a new account or use an existing account.

Overdraft fees can be as high as $38 per item; most of the largest banks charge close to this amount. These fees can add up quickly if you make several transactions before you realize your account has insufficient funds. If you’re making small purchases or have another source of funds, costly overdraft fees may not be worth the protection provided. 

Overdraft fees and their terms and conditions vary significantly from one financial institution to another, so before you opt in, be sure to carefully read your account agreement. Some institutions charge low fees and limit the number of overdraft fees they will assess per day. If your bank or credit union has high overdraft fees, you may find it less expensive to borrow money on a credit card. 

Some financial institutions allow you to sign up to receive email or text alerts when your checking account balance drops below a threshold – $100, for example – that you decide. You may also be able to get an alert whenever a deposit or withdrawal posts to your account, or even opt for a daily email that shows your current balance. This service will help you avoid incurring any overdraft fees by prompting you to add funds to your account, wait a while to make a purchase, or use an alternate means of payment.

Overdraft fees can be an unnecessary strain on your budget and financial well-being. According to the Consumer Financial Protection Bureau, if you regularly overdraft your account—that is, more than 10 times a year—and have opted in for overdraft protection, you are paying about $450 in unnecessary fees each year. After looking at over 40 million consumer checking accounts, the amount of overdraft fees add up to about $15 billion annually in the United States. Often, those hardest hit are consumers who can least afford the extra costs. With some vigilance, however, you can be free of overdraft and NSF fees and make the most of your money.