Insufficient Funds
Insufficient funds also named as non-sufficient funds (NSF) is the state of a current account, the funds in which are not enough for financing all transactions. The term “insufficient funds” also refers to a fee that is charged on presentation of a check, however, cannot be covered by the remaining funds in the account. If a client attempts to withdraw more money than is actually available in the account, the account statement will display the message "insufficient funds" or "non-sufficient funds".
The impossibility of completing a particular payment operation is considered as "bounced". When a financial institution gets a check written on an account with insufficient funds, then it can reject payment and deduct a fee from the balance of the holder. In addition to this, the seller may charge a commission for the returned check.
How NSF fees work
Financial institutions frequently collect NSF fees when a submitted check is returned or payment cannot be carried out because of insufficient funds to cover it. Based on data from the Consumer Financial Protection Bureau (CFPB), the average NSF fee is $34 for 2022.
When a check is drawn and deposited by the payment’s recipient, their bank must release the funds to them in two working days of the deposit being made. However, if there is not enough money in the payer's account, it is considered that they are insufficient funds, and then the NSF commission is charged.
Financial institutions represent their holders of the accounts a few ways to escape from the fees connected with transactions with insufficient funds. Sometimes clients can refuse to overdraft policies that permit the financial institution to cover charges and include an NSF fee. Or they can link a reserve account, for example, saving account or credit card to replenish the insufficient account.
NSF and overdraft fees
Insufficient funds and overdrafts are different bank transactions. Their common feature is the lack of funds and the possibility of charging commissions. NSF fees can be charged by financial institutions when they return presented payments without payment.
For example, a certain client has $500 in his account. He may make an automated clearing house (ACH) or electronic check payment for a purchase worth $530. In case of the refusal by the bank, an NSF fee will be written off. But in case of the approval, the account balance falls to –$30 and an overdraft (OD) fee occurs.
Overdraft protection is a fairly common banking product. If a buyer has $100 in the bank account and makes a $150 purchase using a debit card and has not agreed to a bank overdraft, the transaction will be rejected by the seller. If there is overdraft protection, the transaction will be approved, and the bank may write off an overdraft protection fee.
Banks help their customers set up low balance alerts. Upon reaching a certain amount on the account, the client receives an electronic notification, which helps to monitor the current state of the balance and adjust their expenses.
Several ways to avoid NSF Fees
There are a few ways that available to bank clients to help them steer clear of fees involved in transactions with the insufficient funds:
- smart monthly payment planning;
- monitoring account balances, transactions, and automated payments;
- linking an additional account like a savings account in order to move from one to another to cover lack;
- acquiring a special product from financial institutions, called an overdraft line of credit, that can solve problems with a lack of funds;
- stay away from knowingly writing a check and making payments for an amount greater than the account balance.
More about NSF fees
The control and protection of clients using financial services is carried out by the Consumer Financial Protection Bureau (CFPB). In 2010, a number of legislative acts were adopted that reform the banking industry and affect the NSF and OD fees. In addition, the client could choose overdraft protection from his bank.
Insufficient funds and NSF fees do not address the creditworthiness and credit rating of the client, because financial institutions do not submit information about transactions to credit bureaus. Either way, a rejected check can cause a credit card or loan payment to be delayed, which can impact a customer's credit score.
