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Otherwise, you may be charged an overdraft fee if your bank covers transactions that temporarily lower your account.
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Some banks will be charged if they refuse to pay or cash a check that will result in a negative balance.
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Bankrate’s 2024 checking account survey found that the average overdraft fee was $27.08, while the average NSF fee was $17.72.
Anyone who spends more money than is available in a checking account could be charged either with overdraft fees or invalid funds (NSF) fees. Many people think that the two terms are synonymous, but there are significant differences.
Covering transactions in which a bank has overdrafted accounts can result in overdraft fees, but if the bank refuses a check that has paid or brought the account to red, you may be charged an NSF fee.
Let’s take a look at the main differences between overdraft and NSF fees and how you can avoid them.
What is an overdraft fee?
The obvious fee is often billed by the bank if the transaction is able to pass. It can be considered a temporary loan from a bank, and customers expect to repay the amounts covered by the bank and overdraft fees.
Overdraft fees can be important, but some consumers prefer to simply make rejected transactions. It’s best to take steps to avoid overdraft fees, such as signing up for balance alerts, checking your available balances regularly, and recognizing bank charges per charge.
How much does an overdraft cost?
According to Bankrate Checks and ATM Fee Survey, the average overdraft fee in 2024 was $27.08. This is a slight increase from $26.61 in 2023, and it was the first time this average has not declined since 2021. Last year, 94% of current accounts surveyed by Bankrate were billed.
Many banks impose a limit on the number of overdraft fees they charge to their accounts in a day. For example, a bank’s policy is to charge customers up to three fees per day. If the bank allows four customer transactions to clear excess accounts in one day, the customer will only be charged three fees on that day.
Examples of overdraft fees
Let’s say your account has a balance of $75 and you make a $100 debit card transaction for costs, such as auto repairs. The bank can cover that extra $25 and pass the transaction. Next, you’ll charge a standard overdraft fee – say $30, say – you’re also hoping to pay back $25 for overdrafting your account. In such cases, you will need to fund your account for $55 to cover the fees and remaining auto repair fees.
Banks generally require that excessive accounts be brought into a positive balance quickly, and may ultimately close accounts that have not been reverted to a positive balance. This time frame may vary between banks and you will need to check with your financial institution regarding the policy.
What is NSF fee?
If your account lacks the funds needed to cover the transaction, the NSF fees are generally charged by the bank, and the bank does not allow the transaction to pass. The result may be in the form of a bounced check or e-invoice being denied payment.
How much does NSF charge cost?
The average NSF fee was $17.72 in 2024, a drop of 11% from the previous year, and the bank rate was the lowest since it began its annual checking account fee survey in 1998.
NSF fees are generally declining, but it is worth noting that they are still generally charged. In fact, a Bankrate survey found that about a third of accounts (36%) were not charging NSF fees.
Examples of NSF pricing
Let’s say you just write a check to your landlord for $600 and your checking account has only $500 remaining. When a landlord tries to cash out the check, the bank will not allow the check to pass, and as a result, he will charge an NSF fee.
NSF fees may also apply to electronic payments. Let’s say your monthly car insurance payment is deducted from your account, and on the day the auto-payment is made, you only have $50 in your account. Banks may refuse to trade and charge NSF fees.
In addition to being hit with NSF fees from the bank, if you bounce your check and refuse to pay, you will receive check fees, late fees, or interest fees from the service provider or credit card company you were trying to pay.
Overdraft fees and NSF fees
The following chart compares overdraft fees with NSF fees and lists the circumstances in which banks can charge them.
| Average prices as of 2024 | Transactions that allow clearing? | detail | |
|---|---|---|---|
| Overdraft fee | $27.08 | yes | Banks cover transactions that overdraw accounts and charges are evaluated. Customers are expected to repay the fees as well as money loaned by the bank. |
| NSF Prices | $17.72 | no | The bank will refuse transactions that otherwise overdraw the account. This could result in checks bouncing or electronic payments being denied. The fees are assessed by the bank. |
How to avoid overdrafts and NSF fees
- Overdraft protection: Overdraft Protection is a banking service that automatically transfers money from a linked savings account if your checking account is not sufficient to cover debit transactions, checks, electronic payments, etc. Such a transfer will allow you to clear the transaction (if your linked account has sufficient funds), and you will not collide with overdraft or NSF charges, but some banks will evaluate the fees for overdraft protection transfers.
- Opt out of overdraft: If you instruct your bank not to grant your account, you will not be charged for overdrafts. However, opting out of overdraft means that the bank simply rejects transactions that balance the account negatively.
- Account Monitoring: Closely balancing your accounts can prevent you from initiating debits and other transactions that you cannot cover. Signing up to receive low balanced alerts from your bank also proves useful.
- Find a bank that doesn’t charge these fees: Some banks still allow overdrafts, but they don’t always charge customers for them.
Some banks, such as Wells Fargo, offer customers a bounty period (often 24 hours) to raise their negative account balances before overdraft fees are valued.
How excessive accounts affect your credits
According to Experian, the credit department, if the customer eliminates negative balances, eliminates related fees and does not deposit money to cover related fees, the bank can ultimately hand over the accounts to the collection agency. At this point, it can go to your credit report.
Additionally, excessive dragging on your account can affect your Chexsystems reporting, which can result in your bank account being rejected. Chexsystems is a specialized consumer reporting agency that tracks consumer deposits and debit history.
It is important to repay the negative balance as soon as possible to avoid overdrawn checking accounts having a negative impact on your credit score. Having a conversation with a customer service representative can help you understand your bank’s policies.
The amount of banks earned by overdrafts and NSF fees
Many financial institutions have reduced or reduced overdraft fees and NSF fees, but many banks still make significant profits. In 2024, nearly $5 billion in cumulative revenue was acquired from overdraft fees from the 10 banks that earn the most from these fees, according to the American Consumer Federation, an association of non-profit consumer organizations.
Conclusion
Both overdraft and NSF fees are charged by the bank in various scenarios, with the main difference being charged when the transaction is permitted and the other being collected when denied. Both fees are often important, so it’s important to know how to avoid them to keep your finances on track.