Understanding Non-Sufficient Funds (NSF) & Overdraft Fees

Non-sufficient funds, or insufficient funds, is a banking term used to indicate that the checking account does not have sufficient balance to cover a transaction or payment. Colloquially, NSF checks are also called “bounced” or “dishonored” checks.

Suppose you have $500 in your account and attempt to make a $1,000 purchase with a debit card. In such a situation, if you haven’t opted in for the overdraft planBank Account OverdraftA bank account overdraft happens when an individual’s bank account balance goes down to below zero, resulting in a negative balance. It usually happens when there are no more funds in the account in question, but an outstanding transaction is processed through the account, leading to the account holder incurring a debt., the transaction will be declined. Instead, if you write a check of $1,000, the bank may honor it and assess an OD fee or reject it and charge NSF fees, regardless of whether you have opted in for its overdraft plan.

Summary

• Non-sufficient funds, or insufficient funds, is a banking term used to indicate that the checking account does not have sufficient balance to cover a transaction or payment.
• Having a non-sufficient funds situation can lead to penalties, a bad impact on one’s credit score, and a criminal liability.
• There are several options available to a customer to avoid an NSF situation.

Consequences of Non-Sufficient Funds

Penalties

Due to insufficient funds, if a check is bounced, both the defaulter and the payee are penalized by their respective banks. If the bounced check is against the repayment of any loanLoanA loan is a sum of money that one or more individuals or companies borrow from banks or other financial institutions so as to financially manage planned or unplanned events. In doing so, the borrower incurs a debt, which he has to pay back with interest and within a given period of time., the defaulter may need to bear additional late payment charges. Penalty charges vary and are different for different account types.

Bad Impact on Credit Score

A bounced check can hugely impact a person’s creditworthiness and hamper his/her financial credit history. Financial institutions may feel insecure about lending to someone with a bad credit scoreCredit ScoreA credit score is a number representative of an individual's financial and credit standing and ability to obtain financial assistance from lenders. Lenders use the credit score to assess a prospective borrower’s qualification for a loan and the specific terms of the loan. and failure to pay his/her due debts previously.

Therefore, it is always advisable to save enough funds before applying for a loan. In doing so, lending institutions and banks will be secure with your financial credibility and will not hesitate to lend money.

Criminal Consequences

If a check bounces and the defaulter is unable to pay within the stipulated period, not only does his/her credit score plunges, but he/she can also be prosecuted under existing criminal law, as well as under Section 138 of the Negotiable Instruments Act.

Under Section 138, a dishonored check is a criminal offense, and the aggrieved party can send a legal notice to the defaulter. If found guilty, the defaulter can be charged with imprisonment for up to two years and/or with a monetary penalty, which can be as high as twice the check amount.

Under Sec 417 and 420, if a case of cheatings been proven, a non-bailable warrant can be issued. If more than one check is bounced, the payee can file separate suits against each dishonored check.

Other Repercussions

Banks issue cautionary advice to the defaulter in the event of dishonor of a check. In the case of repeated defaults, they can close the account and stop the check facility. When a check on a loan is dishonored, the banks can issue a legal notice or deduct money from the defaulter’s account.

Checks may be dishonored due to a signature mismatch, overwriting, or a stale date. Legal remedies can be taken only if a clear case of cheating is proven.

How to Avoid a Non-Sufficient Funds Situation

1. Reconcile the checking account frequently and keep track of balances

By keeping track of the balance and frequently reviewing transactions, you will know how much you can spend and, accordingly, can account for any unexpected changes.

2. Set up alerts with the bank

Banks may still allow certain payments to go through even if a customer is short of cash (and charge insufficient funds fees). For example, insurance premiumsInsurance ExpenseInsurance expense is the amount that a company pays to get an insurance contract and any additional premium payments. will most likely be paid even if the bank’s been asked to decline such transactions.

In such situations, you can consider setting up alerts or texts with the bank so that they can be notified before these transactions take place, giving them enough time to cancel the payment.

3. Implement an overdraft agreement with the bank

Consider opting in for the overdraft protection program. When you opt in for the overdraft facility, the bank executes every transaction it is authorized to, regardless of the approved limit.

In turn, the bank charges an OD fee. To avoid hefty overdraft fees, consider signing up for an overdraft line of credit as it is cheaper than per-item overdraft fees.

More Resources

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