Definition
A Non-Sufficient Funds Fee (NSF) is a penalty charge, or overdraft fee on a bank account due to excessive withdrawal from the account.
Analysis
NSF fees have risen dramatically since the mid-1990s. Most large banks charge $35 or more per item. Many credit unions charge less than $10 per overdraft item.
NSF fees are calculated in a way that benefits the bank. On any given day that a checking account has a negative balance, the bank can reorder the charges from that day in any order that they wish so that the maximum number of overdraft fees are charged.
Example
Jane had $100 in her checking account. On this day, she made 3 charges using her debit card:
- $31 for a lunch meeting
- $30 for an oil change
- $75 for groceries
Jane’s total charges are $136, which caused Jane to exceed her available balance by $36. Since the grocery bill was the one charge that caused her checking account balance to drop below zero, she should be charged a single NSF fee.
However, Jane’s bank uses a common practice that allows them to reorder her purchases so that the largest charge is listed first, thereby causing the two smaller charges to both be counted as overdraft transactions. Jane’s bank charges her 2 fees of $35, which causes her balance to drop to -$106.
If Jane does not restore her account to a positive balance within 10 days, she could be charged additional fees. Failure to restore the account to a positive status can result in closure of the account by the bank, an outstanding debt of the negative amount and a negative report with ChexSystems, which can severely limit options for opening a new checking account for 5 years.
