Insufficient funds is an issue that occurs when an account does not have adequate capital to satisfy a payment demand.

Insufficient funds in an account may also be referred to as "non-sufficient funds," or "NSF."

Breaking Down Insufficient Funds

Insufficient funds are the result of a lack of capital deposited in an account. In some cases, funds deposited in an account may not be fully settled, causing a lower than estimated balance.

Insufficient funds is an issue that arises when an account holder seeks to make a purchase or clear a check that their account cannot cover with the funds available. Insufficient funds may lead to penalties that are triggered by payment processing networks when they seek to obtain funds from a cardholder’s issuing bank.

Insufficient Funds Penalties

Insufficient funds in an account can cause varying problems for a cardholder. Bank account holders allow customers to choose the settings pertaining to the bank’s overdraft policies. Overdraft policies can allow a customer to give their bank authorization for covering some transactions rather than declining the purchase. If a bank covers a charge made with insufficient funds, they will typically charge the account holder an NSF fee of approximately $35 per transaction. This allows the purchase to be made but leaves the cardholder with a substantial penalty. If a customer does not authorize overdrawn charges to be paid, then the cardholder’s payments are usually declined with no penalty. If insufficient funds are identified on a check written by a bank account customer, then the customer may be charged a returned payment fee by the company being paid. If a check or declined transaction is associated with a recurring payment, then the account holder may also be charged a late fee for missing the payment due to insufficient funds.

Avoiding Penalties

Banks provide a few options to their customers to help them avoid the penalties associated with an insufficient funds transaction. Account-holders can choose to opt-out of certain overdraft policies that allow the bank to cover charges and add an NSF fee. Account-holders usually also have the option to link a backup account such as a savings account. With a linked account, the funds required for the transaction are taken from the linked account which can serve as a second source of funds.

Many banks also offer overdraft lines of credit. This is a special product that a customer can apply for to cover any issues with insufficient funds. An overdraft line of credit requires the customer to complete a credit application which considers their credit score and credit profile in determining approval. Customers approved for overdraft lines of credit can typically receive a revolving credit line of approximately $1,000. This account can be linked to cover any transactions made with insufficient funds in the primary account. It can also be used for cash advances to the account holder’s checking account.