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Overdraft fees vs. NSF fees: How they differ

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Anyone who’s ever attempted to spend more money than what’s available in their checking account has likely been charged an overdraft fee or an NSF (nonsufficient funds) fee. Many believe the two terms can be used interchangeably, yet there are actually some significant differences.

An overdraft fee may be charged by a bank when it temporarily covers transactions that overdraw your account, allowing one or more to clear. An NSF fee, on the other hand, is what some banks impose when they decline payments or the cashing of checks that would bring the account to a negative balance.

Here we’ll take a look at the main differences between overdraft and NSF fees, as well as ways you can avoid being hit with them.

Overdraft fees

What is an overdraft fee?

An overdraft fee is often charged by a bank when it allows transactions to go through that would otherwise have overdrawn your account. It can be viewed as a temporary loan from the bank, with the customer expected to pay back the amount the bank covered as well as the overdraft fee.

Overdraft fees can be significant, but some consumers prefer them over the embarrassment of having a check bounce or debit transactions declined.

How much do overdraft fees cost?

The average overdraft fee in 2022 is $29.80, according to Bankrate’s checking and ATM fee study. This is down 11 percent from $33.58 in the previous year. While overdraft fees are generally on the decline, they’re still charged by 96 percent of checking accounts surveyed by Bankrate.

Many banks impose limits on the number of overdraft fees they will charge to an account in a single day. For example, a bank’s policy may be to charge a customer a maximum of three such fees per day. If the bank then allows four of a customer’s transactions to clear on an overdrawn account in one day, the customer will only be charged three fees that day.

Example of an overdraft fee

Suppose your account has a balance of $75, and you make a $100 debit card transaction for an expense that comes up, such as a car repair. The bank may cover that extra $25 and allow the transaction to go through. In turn, it charges you its standard overdraft fee — let’s say it’s $30 — and also expects you to pay back the $25 that has overdrawn your account.

NSF fees

What is an NSF fee?

An NSF fee is commonly charged by banks when an account lacks the funds needed to cover a transaction, and the bank does not allow the transaction to go through. The result may be in the form of bounced checks or denied electronic bill payments.

How much do NSF fees cost?

The average NSF fee is $26.58, which is the lowest since 2004 when the average was $25.81, according to Bankrate’s 2022 checking account and ATM fee study.

While NSF fees are generally on the decline, it’s worth noting that they’re still commonly charged. In fact, 87 percent of accounts still charge these fees, Bankrate found.

Example of an NSF fee

Say you write a check to your landlord for $600, yet your checking account only has a balance of $500. When your landlord attempts to cash the check, the bank does not allow the check to go through and charges you an NSF fee as a result.

NSF fees may also apply to electronic payments. Suppose your $100 car insurance payment is debited from your account every month, and you only have $50 in the account on the day the automatic payment is to be made. Your bank may deny the transaction and charge you an NSF fee.

In addition to your being hit with an NSF fee from the bank, having bounced checks and rejected electronic payments can cause you to receive returned check fees, late fees or interest charges from the service provider or credit card company you were attempting to pay.

Overdraft fees vs. NSF fees

The following chart compares overdraft fees and NSF fees, and lists the circumstances under which banks may charge them:

Average fee Transaction allowed to clear? Details
Overdraft fees $29.80 Yes The bank covers a transaction that overdraws an account, and a fee is assessed. The customer is expected to pay back the fee as well as the money loaned from the bank.
NSF fees $26.58 No The bank denies a transaction that would otherwise overdraw the account, which can result in bounced checks or declined electronic payments. A fee is assessed by the bank.

How an overdrawn account can affect your credit

When a customer doesn’t deposit money into an overdrawn account to eliminate the negative balance and cover any associated fees, the bank may eventually turn the account over to a collection agency, according to the credit bureau Experian. At this point, it can go onto your credit report.

To avoid having an overdrawn checking account adversely impact your credit score, it’s important to pay off the negative balance as soon as possible. Having a conversation with a customer service representative can help you to understand the bank’s policy.

Ways to avoid overdraft and NSF fees

Overdraft protection: Overdraft protection is a bank service that automatically transfers money from a linked savings account when there’s not enough in your checking account to cover things like debit transactions, checks or electronic payments. Such transfers allow transactions to clear (when there are sufficient funds in the linked account), and you won’t be hit with overdraft or NSF fees — although some banks do assess a fee for overdraft protection transfers.

Opting out of overdrafts: You won’t be charged for overdrafts if you tell the bank not to allow them for your account. However, opting out of overdrafts means the bank will simply deny any transactions that would bring your account into a negative balance.

Account monitoring: Keeping close tabs on your account balance helps ensure you won’t initiate debits or other transactions that you’re not able to cover. Signing up to receive low-balance alerts from your bank can also prove useful.

Finding a bank that doesn’t charge these fees: Some banks still allow for overdrafts but may not always charge customers for them. Banks that have eliminated overdraft fees or NSF fees — or both — include Ally Bank, Bank of America, Capital One, Citibank, PNC Bank, U.S. Bank and Wells Fargo.

Some banks also provide customers with a grace period — often around 24 hours — to bring up a negative account balance before overdraft fees are assessed.

Why overdraft and NSF fees are down

Overdraft and NSF fees generate a significant amount of revenue for banks, although these fees have been on the decline recently as banks face increasing public pressure to reduce or eliminate them.

The Overdraft Protection Act of 2021 is proposed federal legislation that seeks to limit what banks can charge per overdraft to an amount that is “reasonable and proportional” to the amount of the overdraft and the cost of processing it.

The proposed law would also limit the number of overdraft fees a bank may charge a customer to one per month and six per year.

Banks have also been urged to lower these fees by the Consumer Financial Protection Bureau (CFPB), which refers to them as “junk fees” that can drain Americans’ budgets.

How much banks earn in overdraft and NSF fees

Overdraft fees and NSF fees are on a general decline, yet they still generate significant revenue for many banks. Revenue earned by each of 20 big banks from overdraft and NSF fees in 2021 ranged from $50 million to $1.4 billion, according to the CFPB.

What’s more, the vast majority of banks still do assess these fees, with 96 percent of banks still charging for overdrafts and 87 percent continuing to charge NSF fees, according to Bankrate’s latest check and ATM fee study.

Bottom line

Overdraft fees and NSF fees are both imposed by banks in different scenarios, with the main difference being one fee is charged when transactions are allowed to clear, while the other is levied when they’re denied. Both fees are often significant ones, so knowing how to avoid them is important in keeping your finances on track.

Written by
Karen Bennett
Consumer banking reporter
Karen Bennett is a consumer banking reporter at Bankrate. She uses her finance writing background to help readers learn more about savings and checking accounts, CDs, and other financial matters.
Edited by
Managing editor