What Is a Returned Payment Fee?

The term returned payment fee refers to a charge issued by a financial institution or another creditor when a consumer bounces a payment (i.e. your bank is unable to process the transaction due to a variety of reasons). Payments may be returned because of insufficient funds, account closures, or account freezes. Returned payment fees discourage customers from submitting checks or other forms of payment they know will not clear.

Key Takeaways

  • A returned payment fee is a charge incurred when a consumer bounces a payment.
  • Payments may be returned because of insufficient funds in a consumer's account, closed accounts, or frozen accounts.
  • Banks and other financial institutions charge their consumers returned payment fees.
  • Returned payment fees are also charged by service providers like cable subscription services, cell phones, wireless service providers, and gyms.
  • Credit card companies generally charge the highest returned payment fees of any creditor.

Understanding Returned Payment Fees

Creditors charge consumers a series of fees—some are for services rendered while others are punitive. Service fees range from account maintenance charges, minimum balance fees, and funds transfer charges. Punitive fees and penalties include things like non-sufficient funds (NSF) charges, late fees, and returned payment fees. Creditors must specify the amount of any fees including those for returned payments in the agreement.

Returned payment fees, also called dishonored payment fees, are charged when a customer makes a payment with insufficient funds to cover a payment. Depending on the creditor, returned payment fees generally range anywhere between $25 and $40 per instance. As noted above, payments may be returned for any number of reasons including insufficient funds in a consumer's account or because of closed accounts. Banks may also freeze accounts for legitimate reasons including suspicious activity or government garnishments, which can also result in payments being returned.

While returned payment fees are most common with checks, they may also occur with payments that are made online or scheduled to be taken automatically. Consumers should be cautious when paying with a check or setting up an automatic payment. Customers who know they won't have enough money to cover their payment by the due date shouldn't send the creditor a check. While late fees and interest charges may apply, they won’t have additional charges like a returned payment and NSF fee. Customers can easily cancel any recurring payments or make changes to the payment method to an account that can cover the charge to avoid a returned payment fee.

When your creditor charges a returned payment fee, there's a very good likelihood that you'll incur an NSF fee from your bank as well.

Special Considerations

Some institutions may waive returned payment fees in certain conditions. For example, they may waive the fee for a first-time occurrence or for customers with accounts in good standing. Others may also waive the fee in case the consumer has a good reason why the payment was rejected. It's always best to talk to your financial institution if there was a viable error for which you had no control.

A returned payment fee often comes along with late payment fees and interest. If you try to pay your credit card bill at the last minute but your payment doesn’t clear, your monthly minimum payment becomes overdue, and you will owe a late fee. A few credit cards do not charge late fees at all or will waive the late fee the first time the customer has a late payment.

Even if a late fee doesn’t apply, interest charges will almost always apply. You may also be subject to an increase in your interest rate if your returned payment means you’ve missed your minimum payment deadline. Your bank may also charge you an insufficient funds fee—also known as an NSF fee—for writing a check that didn't clear.

Types of Returned Payment Fees

Credit card companies generally have some of the highest returned payment fees. In fact, they can be as high as $40. To find out whether your credit card has a returned payment fee and how much it is, check the card’s terms and conditions. Returned payment fees are also charged by other creditors including cable subscription services, cell phone companies, and wireless service providers, and gyms. Many contracts like car leases and financing may also outline returned payment charges.