How to Avoid an Insufficient Funds Fee

Image by Emilie Dunphy © The Balance 2019 

When you make a payment from your checking account, you should have that money available already. Whether you write a check, use your debit card, or make an electronic funds transfer, if you don't have that money already in your account, your bank can decline the transaction due to insufficient funds.

What Does Insufficient Funds Mean?

Insufficient funds is a banking term for when your account does not have enough money available to cover a payment.

For example, say you write a check or sign up for automatic bill pay with your electric company to pay your light bill. When that payment hits your account (either because your biller pulls the funds or deposits your check), the bank compares how much you have and how much you owe on the payment. If you don’t have sufficient funds to cover it, the bank can reject the payment: no money will leave your account, and the biller will not get paid.

You may also hear the terms payment rejection, bounced check, overdrawn account, or non-sufficient funds (NSF); these all refer to not having enough money in an account to cover a payment.

What Happens When You're Overdrawn

If you don't have enough money in your account to cover a payment, your bank may simply decline the transaction. But that's not all that can happen:

  • Fees pile up: When you have insufficient funds, your bank will charge you a fee—usually between $27 and $35. Also, whoever you tried to pay will most likely also charge you a fee. A business that deposits your bad check will get dinged by their bank and then pass the charges on to you. There’s often a penalty for failed electronic payments, too. And if you bounce several checks in a row, those fees really start to stack up.
  • Your reputation is damaged: Banks don’t like customers who overdraw their accounts (even though those customers generate a lot of revenue). If you overdraw your account too often, your name might end up in databases that track consumers with a history of writing bad checks. That may make it tougher to get a bank account in the future. Your bank might even simply close your account.
  • Legal and credit troubles: Unpaid bills can go to collections and cause you trouble down the road. If you make a habit of overdrawing your account without using overdraft protection, you can eventually end up hurting your credit scores – and you might even have legal problems if it seems like you’re intentionally spending more than you can afford to.

How to Limit or Avoid NSF Fees

Banks offer several overdraft protection programs that will cover your payment if funds are low.

Overdraft Protection

With overdraft protection, instead of rejecting transactions, your bank will pay them as if you had enough money—but they'll charge you around $35 each time. Also, you still need to replace those funds quickly.

Overdraft protection is optional; you need to opt in if you want it on your checking account, and it’s not always a good idea. Opt in, and you authorize your bank to process every transaction, whether you can afford it or not, as well as charge you fees each time you overdraw. If you don’t opt in, your debit card will simply be declined at the cash register if you try to make a payment that you can’t afford. Then you can choose whether to use a different card, pay cash, or do without.

Ask the Bank to Waive the Fee

Your bank can charge you the full overdraft fee even if you're only pennies short of the amount owed. If you've been a great customer and rarely, if ever, overdraw your account, consider calling your bank and asking them to waive the fee. You just might get a sympathetic service rep on the line willing to accommodate you.

Overdraft Line of Credit

If you don't want to pay hefty overdraft fees, but you still worry about those times you'll accidentally spend more than you have, you can sign up for an overdraft line of credit.

These lines of credit are less expensive than per-item overdraft fees. Instead of a flat fee, you’ll pay interest on the amount you “borrow,” which is usually less than the fee.

Link Your Checking and Savings Accounts

Another way to avoid the more expensive overdraft fees is to link a savings account to your checking account. If you overdraw, your bank will pull the needed funds from savings. There might still be a flat fee with this option, but it's typically $10 or so—less than with traditional overdraft charges. Check the specifics with your bank.

Set up Alerts With Your Bank

Note that whether or not you sign up for overdraft protection, your bank might still allow payments to go through when you’re short of cash (and charge you insufficient funds fees). Automatic recurring payments, such as utility payments or insurance premiums, will most likely be paid even if you’ve asked your bank to decline transactions when you’re out of money. Consider setting up alerts or texts with your bank so that you're notified before these transactions go through, leaving you enough time to get money into your account or cancel the payment.

Keep Track of Your Balance

Know how much you have available by monitoring and frequently balancing your account. If you keep track of your balance, any upcoming automatic payments, and any holds or freezes on your account, you’ll know how much you can spend even before your bank does. It’s a good idea to review transactions regularly so that you can spot fraud early, too.