If you’ve ever been caught short in your checking account, you may have been hit with an overdraft or nonsufficient funds fee. These terms can be confusing, and they are not interchangeable. Although banks and credit unions can’t charge both fees on the same transaction, even one fee can be costly.
Overdraft
An overdraft fee is charged when there’s not enough money in an account to cover a transaction. Instead of rejecting the transaction, the bank covers the payment and charges an overdraft fee. For example, if you spend $50 and only have $25 in your account, the bank will approve the transaction and charge you an overdraft fee, as well as the $50.
Overdraft fees range from $10 to $40, with the average fee being around $35 according to the Federal Deposit Insurance Corporation, depending on the bank.
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Nonsufficient Funds Fee
A nonsufficient funds fee is charged when a payment doesn’t clear because there’s not enough money in the account. The bank doesn’t approve the transaction, and an NSF fee may result from a bounced check or a denied electronic bill payment. For example, if your utility bill is paid automatically from your checking account, and you don’t have enough money to cover it, the payment will be denied, and your bank could charge an NSF fee, while your utility company may charge you a late payment fee.
NSF fees range from $10 to $40, with the average fee being $34 according to the Consumer Financial Protection Bureau.
How to avoid Overdraft and NSF fees
To avoid these fees, you can enroll in overdraft protection, sign up for low-balance alerts, find a bank that doesn’t charge overdraft or NSF fees, and stay on top of your balance. Participating in overdraft protection can help you avoid fees by moving money from a savings account or another financial account to help cover a charge made to your checking account. Some banks are shifting away from overdraft and NSF fees altogether, such as Capital One and Citibank.
Ultimately, the best way to avoid fees is to stay on top of your account balance and transactions, so you know when you’re approaching your limits. By being proactive and taking the necessary steps to avoid these fees, you can save money and keep your finances in good shape.
