What Are Non-Sufficient Funds (NSF)?

The term non-sufficient funds (NSF), or insufficient funds, refers to the status of a checking account that does not have enough money to cover transactions. NSF also describes the fee charged when a check is presented but cannot be covered by the balance in the account. An individual may see a "non-sufficient funds" or "insufficient funds" notice on a bank statement or at an ATM terminal (or on a receipt) when attempting to withdraw more money than their account holds.

Colloquially, NSF checks are known as bounced checks or bad checks. If a bank receives a check written on an account with insufficient funds, the bank can refuse payment and charge the account holder an NSF fee. Additionally, a penalty or fee may be charged by the merchant for the returned check. By law, certified checks and cashiers checks must be made available to you within one business day of deposit.

How Non-Sufficient Funds Work

NSF fees occur because Banks often charge these fees when a presented payment is returned due to insufficient funds. A similar fee may be assessed when honoring payments from accounts with insufficient balances. The latter scenario describes an account overdraft (OD), which is often confused or used interchangeably with non-sufficient funds.

The fees many banks charge for NSF checks are a point of contention between consumers and banks. Consumer advocates allege that since fees are usually a fixed amount, a customer may, in effect, be paying extraordinarily high interest rates for relatively small deficits in their accounts.

Key Takeaways

  • The term non-sufficient funds (NSF), or insufficient funds, refers to the status of a checking account that does not have enough money to cover transactions.
  • The average NSF fee in the U.S. ranges between $27 and $35.
  • Writing an NSF check may result in criminal charges, especially for large amounts.
  • The acronym NSF also describes the fee charged when a check is presented but cannot be covered by the balance in the account. 
  • Under new laws, consumers can opt for overdraft protection through their banks. Opting for overdraft protection affects credit and debit card transactions in particular.

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.

Non-sufficient funds and overdrafts are two different things, though both can trigger fees and penalties.

Overdraft vs. NSF Fees

Banks charge NSF fees when they return presented payments (e.g., checks) and overdraft fees when they accept checks that overdraw checking accounts. Imagine, for example, someone has $100 in their checking account, and they initiate an ACH or electronic check payment for a purchase in the amount of $120.

If their bank refuses to pay the check, they incur an NSF fee and face any penalties or charges the seller assesses for returned checks. If their bank accepts the check and pays the seller, their checking account balance falls to -$20 and incurs an OD fee. Either way, the fee assessed by the bank reduces the available account balance.

How to Avoid Fees

Bank customers can avoid NSF fees by properly budgeting or keeping contingency amounts in their checking accounts so that they do not intentionally or inadvertently overdraw. In addition, customers should carefully monitor the use of checks, debit cards, and automated charges, which are common causes of overdrafts.

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.

Special Considerations

In 2010, the U.S. government created a set of sweeping bank-reform laws to address OD and NSF fees among other consumer banking issues. Under the laws, consumers can opt for overdraft protection through their banks. Opting into overdraft protection affects credit and debit card transactions in particular. Like any banking service, it can pay to read the fine print and study the pros and cons.

For example, a person has $20 in their checking account and attempts to make a $40 purchase with a debit or check card. If they have not opted into their bank's overdraft plan, the transaction will be declined by the retailer; if they have opted in, the transaction may be accepted, and the bank may assess an OD fee. However, if they write a check for $40, the bank may honor it and assess an OD fee—or reject it and assess an NSF fee, regardless of whether they have opted into its overdraft program.