So you might be wondering — what exactly is an overdraft and why do financial institutions charge fees for them? And how is an overdraft different from an NSF? Read on to learn the difference and see what options are available to you to avoid them.
Overdraft
An overdraft happens when your checking account doesn’t have enough money to cover a transaction but you do have Overdraft Protection in place, allowing the transaction to go through and preventing the consequences of late fees and declined payments. Common options include:
- Drawing funds from your savings to cover transactions like checks, electronic debits, debit card purchases, or payments scheduled through Bill Pay. A fee usually applies to each transfer.
- Drawing from a line of credit that you established for this purpose. Typically there are no transfer fees, but you do accrue interest on advanced funds.
The fees associated with these safety net programs are published in the financial institution’s fee schedule, and they must make this information available in compliance with the Truth in Savings Act. You can find the fee schedule posted on the financial institution’s website, or you may request a copy from a branch. You are also provided a copy when you open a new checking or savings account.
NSF Fee
An NSF fee, or non-sufficient funds fee, is charged when an account doesn’t have enough money to cover a transaction and there are no overdraft protection alternatives in place, so the transaction is canceled or rejected. NSF fees typically occur with written checks and electronic debit ACH (Automatic Clearing House) transactions. In the case of a written check, the payee can run it multiple times, each time resulting in an NSF fee for the rejection. Plus, the payee may impose their own late fees or other missed payment consequences since the transaction didn’t go through — which can quickly add up. Check out your financial institution’s fee schedule to learn more about the true costs of a rejected check.
Tips for Avoiding Overdrafts
- Set up Direct Deposit so your paychecks go directly into your account on payday, instead of waiting for a check to arrive by mail then finding time to deposit it at the bank.
- If your employer doesn’t offer Direct Deposit, try depositing checks remotely with your financial institution’s Mobile App, if the service is offered.
- Make it a habit to log onto Online Banking and review your transactions regularly.
- If offered, set up alerts in Online Banking to receive notifications about your account activity.
- Set up Bill Pay and schedule your bills on paydays.
- Make a plan to build your emergency savings — your small change can add up fast and make a big difference.
Many financial institutions may waive these fees for certain types of checking accounts. See SESLOC’s options here.
