Overdraft Fees vs. Nonsufficient Funds Fees: What's the Difference?

Overdraft and NSF fees can add up quickly if you don't know how to avoid them.

A woman is sitting on a couch while working on her computer.
fizkes/Getty Images

If you've spent more than what's available in your checking account, you've likely been charged an overdraft or a nonsufficient funds fee. The two terms come off as interchangeable, but they're not. While banks and credit unions cannot charge both an overdraft fee and an NSF fee on the same transaction, incurring even one of these fees can be costly. 

What is an overdraft fee?

Banks charge overdraft fees when you don't have enough money in an account to cover a transaction. Instead of declining the transaction, the bank covers the payment and charges you an overdraft fee. For example, if you purchase an item for $50 and only have $25 in your checking account, the bank will approve the transaction and charge you an overdraft fee plus the amount owed. 

How much do overdraft fees cost?

According to the Federal Deposit Insurance Corporation, the average overdraft fee is around $35, but fees can range from $10 up to $40, depending on the bank. 

What is an NSF fee?

Banks charge a nonsufficient funds fee when a payment doesn't clear because you don't have enough money in your checking account. In this case, the bank doesn't approve the transaction. An NSF fee may result from a bounced check or denied electronic bill payment. Let's say your utility bill is paid automatically from your checking account each month, and you don't have enough to cover the bill. The payment will be denied, your bank could charge you an NSF fee and your utility company may charge you a late payment fee. 

How much do NSF fees cost?

NSF fees range from $10 to $40, but according to the Consumer Financial Protection Bureau, the average NSF is $34. 

What is overdraft protection?

Overdraft protection is an optional feature offered by banks to prevent the rejection of a charge on a checking account with insufficient funds. If you opt for overdraft protection, the bank will automatically cover the transaction by moving funds from a linked savings account or line of credit to the overdrawn account. The bank may charge you a transfer fee, but this fee is often much less than an overdraft fee. Online banks tend to offer free overdraft protection, but standard banks charge roughly $10 to $12.50 per transfer. 

What is the difference between an overdraft fee and an NSF fee?

Your bank may charge an overdraft fee to your account if you do not have enough funds for a transaction, and the bank covers the charge on your behalf. An NSF fee is charged when your account is overdrawn, and the bank declines the transaction.

How to avoid overdraft and NSF fees

Overdraft fees and NSF fees don't have to be a common consequence. There are four steps you can take to avoid them.

  1. Enroll in overdraft protection 

Participating in overdraft protection can help you avoid overdraft fees by moving money from a savings or other financial account to help cover a charge made to your checking account. This service generally isn't free, but an overdraft protection transfer charge is typically more affordable than an overdraft fee. 

2. Sign up for low-balance alerts

You may be able to receive low balance alerts from your bank's mobile app, so you know if your account balance is dropping below a certain threshold. 

3. Find a bank that doesn't charge overdraft fees

Look for a different bank if you aren't happy with your bank's overdraft or NSF fee policies. Some banks are shifting away from overdraft and NSF fees altogether, including Capital One and Citibank. Bank of America also eliminated NSF fees but recently reduced its overdraft fees to $10.

4. Stay on top of your balance 

Keep an eye on your balance, deposits, transactions, withdrawals and automatic payments by regularly monitoring your account. Note any upcoming payments or pending transactions that may not automatically reflect on your account's balance in real time.

The bottom line

Overdraft and NSF fees can add up quickly if you're not careful. Being mindful of your finances and setting up low-balance alerts can help you avoid these fees. Additionally, linking multiple accounts and considering optional overdraft protection can help you stay on top of your finances and avoid costly fees.

Correction, 7:30 a.m. PT Jan. 25: A previous version of this article mislabeled the number of steps to avoid overdraft and NSF fees. It should be four, not five. Also, as a point of clarification, Bank of America recently eliminated NSF fees but recently reduced its overdraft fees to $10.