Some banks charge customers for having insufficient funds in their accounts. But a lot of banks are eliminating those fees.
Banks charge a lot of fees — monthly service fees, ATM fees, excessive transaction fees and many more. While all those costs can be annoying, one of the most frustrating fees that can land on your account statement is a nonsufficient funds, or NSF, fee. NSF fees are often lumped in with overdraft fees, but theyre not the same.
Read on to learn exactly what NSF fees are, why banks charge them and how you can avoid paying them.
Have you ever been slapped with an unexpected fee from your bank for not having sufficient funds in your account? These frustrating charges are known as nonsufficient funds (NSF) fees, or overdraft fees, and they can add up quickly. But why do banks charge for this in the first place, and is it even legal? Let’s break it down.
What Are NSF and Overdraft Fees?
When you make a transaction but don’t have enough money in your account to cover it one of two things can happen
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NSF fee The bank declines the transaction since you lack the funds. They charge you a fee for the trouble usually $25-35.
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Overdraft fee: The bank pays the transaction anyway as a courtesy, then charges you a fee for dipping into the negative. This also tends to cost $25-35.
Banks justify these fees as necessary to cover the administrative costs of handling your insufficient funds. But consumer advocates argue they’re predatory and disproportionately affect low-income customers.
Over 70% of overdraft fees are paid by chronically broke customers who overdraw more than 10 times per year. These customers only account for 9% of total bank customers.
Why Do Banks Charge Them?
NSF and overdraft fees rake in huge profits for banks. Here are some of the key reasons banks rely on them:
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Big revenue source – Overdraft fees alone generate $15 billion+ in annual revenue for banks.
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Low risk – There’s no risk to the bank since they’re guaranteed to collect the fee once it’s charged.
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Deters overspending – Charging fees discourages customers from overdrawing their accounts.
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Covers costs – Processing bounced transactions generates administrative costs like staff time.
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Easy to justify – Banks can defend fees by framing it as a “courtesy” service for covering insufficient funds.
Do Customers Have Options?
Fortunately, yes. Here are a few ways to avoid surprise NSF or overdraft fees:
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Opt out of overdraft coverage – Call your bank to opt out so transactions are simply declined if funds are low.
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Monitor balances closely – Check your balance frequently to avoid overdrafts. Set up text alerts.
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Link to savings – Connect checking and savings so money transfers automatically to cover shortfalls.
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Use a credit union – Credit unions are member-owned nonprofits and less likely to charge high fees.
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Switch banks – Many online and regional banks don’t charge overdraft fees at all.
Is It Legal for Banks to Charge These Fees?
Yes, it’s legal, though controversial. Here’s why:
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Banks are private companies – they can set account terms, including fees, at their discretion.
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Overdraft coverage is technically optional – customers must proactively opt in so banks can market it as a “service.”
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Existing laws don’t prohibit the fees – no federal laws strictly regulate overdraft programs.
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Court rulings upheld the legality – fee lawsuits brought against banks have consistently failed.
However, government regulators like the Consumer Financial Protection Bureau (CFPB) have aggressively targeted overdraft fees lately:
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They’ve called out practices as “unfair” and “abusive.”
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They’re requiring banks to make overdraft opt-in and fees more transparent.
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They’re pressuring banks to curtail programs through public shaming.
So far it’s working – banks from Wells Fargo to Bank of America have eliminated non-sufficient funds fees lately. But overdraft fees remain widespread for now.
The Bottom Line
Banks rely heavily on overdraft and non-sufficient funds fees as a revenue source because they’re profitable and easy to legally justify. But increased regulatory pressure is pushing more banks to cut back on the most aggressive practices. As a customer, you can take action by monitoring your balances closely, shopping around for banks with lower fees, and complaining to regulators about unfair fees. With vigilance, you can minimize the likelihood you’ll have to unnecessarily pay just because you’re short on cash.
What are NSF fees?
Banks charge NSF fees when you don’t have enough money in your checking account to cover a payment, whether from a bounced check or a denied electronic bill payment. For example, let’s say youve set up automatic bill pay with your telephone provider. If the monthly bill is $107, but you only have $50 in your account on the day it’s due, your bank might hit you with an NSF fee. And if you write a check that cant be cleared due to a shortage of money in your account, those NSF fees can pop up, too.
Sound punitive? It is. A bank can charge you money for not having enough money. It’s why the Consumer Financial Protection Bureau has been pushing banks to do away with NSF fees. The efforts have been paying off, too. According to data from Bankrate, CNET’s financial sister site, the average NSF fee dropped to $19.94 last year — a record low. In fact, you won’t find NSF fees at any of the biggest banks in the country.
Are there banks that don’t charge NSF fees?
NSF fees are disappearing from the fee schedules at the biggest banks in the country. In fact, by the end of 2022, 23 of the 25 banks that had reported the most revenue from NSF and overdraft fees had eliminated NSF charges, according to the CFPB. And in some cases, banks are easing the pinch of NSF fees. The First National Bank of Texas, for example, does not charge NSF fees if the cost of a returned item is $5 or less.
Why banks charge fees (and how to avoid some!)
FAQ
Why do banks charge you for not having money?
Overdraft fees
When you spend more than you have in an account, this results in an overdraft, or a negative balance. An overdraft fee can be charged when the bank covers such a transaction that would otherwise overdraw your account.
Why do banks charge for insufficient funds?
Can I get rid of the NSF fee?
Yes, you can request your bank to waive a Non-Sufficient Funds (NSF) fee. Here are some steps you can take to increase your chances of a successful request: Contact Customer Service: Call or visit your bank’s customer service and explain your situation. Be polite and concise.
Why do banks charge for minimum balance?
This balance is required for banks to cover the cost of operations. After all, banks are businesses and must bear overhead costs, manage branches, maintain accounts, deliver customer service and much more. These expenses are easier to manage when minimum balances are maintained.
Why do banks charge a lot of fees?
Some banks charge customers for having insufficient funds in their accounts. But a lot of banks are eliminating those fees. Banks charge a lot of fees — monthly service fees, ATM fees, excessive transaction fees and many more.
Can a bank charge you money for not having enough money?
A bank can charge you money for not having enough money. It’s why the Consumer Financial Protection Bureau has been pushing banks to do away with NSF fees. The efforts have been paying off, too. According to data from Bankrate, CNET’s financial sister site, the average NSF fee dropped to $19.94 last year — a record low.
Does my bank charge a fee?
Regardless of whether your bank charges a fee, your payee may charge a fee as well. Set up low-balance alerts to notify you when your account is low. A wire transfer can be the best way to send money fast. However, banks often charge for this service.
How do I avoid bank fees?
Otherwise, the best way to avoid fees is to use a different method of payment or choose a bank that doesn’t enforce these fees. Many banks charge a fee when you use your bank card in a foreign country or non-U.S. currency is processed on the account. In most cases, this is not a flat fee but amounts to about 3% of the total transaction.
Do banks charge a maintenance fee?
Banks may also charge an account maintenance fee, also known as monthly service fees, just for having the account or for falling below a certain minimum balance, per the FDIC. Banks, of course, can charge a range of other fees, including ATM use fees, per-check fees, and stop-payment fees.
Can a bank charge a fee if you have less than $500?
Say your bank has a minimum balance set at $500. If you usually have less than $500 in your checking account, you might have to pay a fee to the bank. How to avoid it: Check the minimum balance your bank asks you to keep in an account. If you can, maintain the minimum amount or more in the account. This will prevent you from paying bank fees.