NSF Fees: How They Work and Ways You Can Avoid Them
Let’s face it; no one likes getting charged bank fees. It’s one of the main reasons online banks have surged in popularity in recent years. But even online banks charge NSF fees. If you’re unfamiliar, here’s how NSF fees work and how you can avoid them.
What Is an NSF Fee?
A non-sufficient fund, or NSF fee, is charged by your financial institution when you don’t have enough funds to cover a cheque or pre-authorized debit on your bank account. This is known as a bounced cheque or bounced payment. Banks charge NSF fees on a per-item basis – so at $45 each, multiple NSFs can prove to be costly.
Why Are NSF Fees Charged?
NSF fees serve a couple of purposes. First, they cover the administrative costs incurred by the bank to return the non-sufficient funds item. Also, NSF fees act as a disincentive for customers to leave their accounts with insufficient funds. The good news is that there are ways to avoid NSF fees, which I’ll cover a bit later.
NSF Fee Examples
NSF fees aren’t that complicated, but here are a couple of examples to clarify any confusion.
Example 1: Bounced cheque
Let’s say you have a chequing account balance of $150, and you write a cheque for $175 for your child’s soccer registration. When the cheque attempts to clear your account, the $25 shortfall will result in the cheque bouncing and a likely NSF charge.
Now, consider this. The $150 cheque will get returned unpaid to the cheque recipient, which means that you still owe them that money. However, you’re now short an extra $45 or so dollars, making it that much harder to pay them back.
Example 2: Pre-authorized debit
A pre-authorized debit is a payment you’ve arranged to come out of your account regularly. These include, but are not limited to, loan payments, cell phone or utility bills, mortgage payments, insurance premiums, and investment contributions.
Let’s say you have $300 in your bank account on July 30th. The problem is, your car loan payment comes out each month on the 30th, and it’s $475. Unless you have overdraft protection to cover the shortfall, the car loan payment will bounce, resulting in a costly NSF fee. Also, you still owe the $475, and the lender will expect to receive payment as soon as possible.
Most Canadian adults have at least one or two pre-authorized payments coming out of their account each month. If there are insufficient funds in your account at the time a pre-authorized payment goes out, you will be charged an NSF fee.
The Impact of NSF Fees on Your Finances
There are several ways in which non-sufficient funds can have a negative impact on your finances, from the sheer cost to making it more difficult to get approved for credit. Here are three reasons to avoid getting an NSF charge:
1. Hurts Your Bottom Line: At a minimum of $45, one NSF charge alone is steep. If you have a habit of insufficient funds, multiple NSF charges will quickly kill your budget, and make it difficult to cover basic expenses.
2. Results In Additional Overdraft Fees: On top of the NSF fee, anytime your chequing account has a negative balance, your bank charges overdraft fees – interest on the amount owing until your account moves back into a positive balance. Overdraft interest rates are high, usually over 20%, so the cost can add up quickly.
3. Makes It Harder to Obtain Credit: Banks do not report customers’ NSF records to the credit bureau, but they are recorded in your account history. If you are applying for any type of credit – overdraft protection, a credit card, loan, or even a mortgage – at your primary bank, they will take into account how you manage your chequing account. Customers with a track record of insufficient funds may find it difficult to get approved.
4. Reputational Risk: If you have a track record of multiple NSFs, it can be damaging to your reputation. If insurance premiums bounce repeatedly, your coverage may be at risk. If your rent cheque is constantly bouncing, it can sour the relationship with your landlord or property manager.
How Much Is an NSF Fee In Canada?
The amount a bank charges for an NSF fee varies between institutions, but it typically lies between $45 and $50 per returned item. As with other bank service charges, NSF fees have increased substantially over the past several years. Here’s a list of NSF fees from various Canadian financial institutions:
- BMO: $48
- CIBC: $45
- RBC: $45
- Scotiabank: $48
- TD: $48
- Laurentian: $65
- Meridian: $48
- Simplii: $45
- Tangerine: $45
- Vancity: $45
How NSF Fees Might Appear On Your Bank Statement
Banks and credit unions have their codes to denote when an NSF fee appears on your bank statement. Here are a few different ways an NSF fee might appear on your bank statement.
- RTN NSF
- Returned Cheque NSF
- NSF Fee
- NSF S/C (service charge)
- NSF Cheque
It’s a good idea to regularly review your chequing account transaction history to be on the lookout for any NSF activity. That way, if you notice something, you can avoid a small problem becoming a larger one.
What Is an Honoured NSF Fee?
Sometimes, your bank will allow a cheque or automated debit to clear your account, even if you don’t have the required funds. When this happens, your bank will still charge a small fee – usually around $5 – but the item will be honoured. There is no standard policy for this to occur, so you should always aim to have sufficient funds in your account before an item clears.
How Does Overdraft Protection Work?
Overdraft protection, or ODP, allows your chequing account balance to go into the negative up to a predetermined limit. All banks and credit unions offer some form of overdraft protection as a convenient way to avoid NSF fees. It’s a form of credit in that whenever you use overdraft funds, you are doing so with borrowed money.
Overdraft protection interest rates tend to be very high, even higher than credit card interest rates. For that reason, you should only consider overdraft for emergencies. If you do go into overdraft, you should have a plan to return your bank account balance to the positive as soon as possible.
There are two costs to consider with overdraft protection. The monthly fee (if any), and the overdraft interest that’s charged. While different banks have different overdraft fees, here’s an example of how it could look:
Overdraft Protection Example:
Chequing Account Balance: $325
Available Overdraft: $500
In this situation, even though the balance of your chequing account is $325, you have an available balance of $825.
If a cheque clears your account for $600, your account balance will move to a negative balance of ($275). You’ve avoided a costly NSF fee, but you’ll be charged daily interest on the negative balance ($275) until it returns to the positive.
Ways to Avoid NSF Fees
Let’s face it, getting an NSF fee on your account is no fun. Thankfully, there are ways to avoid getting charged. Here’s the list I’ve come up with:
Keep a Higher Balance In Your Account
While it’s not possible for everyone, if you can maintain a higher chequing account balance, you’ll have more than enough to cover cheques and other payments coming out of your account, reducing the need to worry about an NSF item.
Perhaps you keep extra funds in a savings account. Could you move some of this money into your chequing account as a buffer? A $48 NSF fee is more than any interest that money will earn in a savings account that pays a fraction of one percent of interest.
Track Your Spending
With the advent of mobile banking, your bank has made it easier than ever to keep track of your spending. By watching your account regularly and keeping your spending in line with your budget, you reduce the chances of getting an NSF.
Create a Budget
Many people grimace when they hear the word budget, but it shouldn’t be intimidating. A budget is simply a plan for your money. If you’re having a hard time juggling your payments, or you find yourself living from paycheque to paycheque, it’s time to create a budget. Set a time period for your budget – monthly or biweekly, for example. Then subtract all of your expenses over the same period. The amount remaining is your net income, or what you have to live on.
Sign Up for Overdraft Protection
As previously mentioned, most banks offer some form of overdraft protection. It can spare you many costly NSF charges, especially if you don’t watch your account all that closely. In my opinion, you should consider overdraft protection only as a last resort due to the fees and interest rates. Your best bet is to focus on the other overdraft avoidance methods I mentioned – creating an account buffer, tracking your spending, and creating a budget.
How Do I Get My NSF Fee Waived?
If all else fails and your bank charges an NSF fee, you can always ask them to reverse the charge as a goodwill gesture. I find that most banks are willing to do this at least once but don’t expect more than that unless it’s due to an error on their part; still, it never hurts to ask.
Final Thoughts on NSF Fees
For most people, not all, NSF fees are very much an avoidable expense. All it requires is some advanced planning (budgeting) and regularly keeping track of your bank accounts. By spending a few minutes a day, you can save money and avoid a lot of stress.