Does NSF Fee Impact Credit Score?

Ever had a payment bounce because you didn’t realize your balance was low? A declined transaction may feel like an inconvenience, but the NSF fee attached to it can be a financial headache. When a bank declines a transaction by the customer due to the lack of available funds in a current account, the customer may be liable to pay a ‘non-sufficient funds’ charge as a penalty fee. 

These charges can feel unexpected and frustrating, especially when you’re not aware of how easily they can add up. Before that happens, it’s important to understand ‘what are NSF fees?’, ‘how do they impact your credit?’, and most importantly, ‘how can you avoid them’ and protect your account from future penalties.

What Does NSF Fee Mean?

A non-sufficient funds (NSF) fee is charged by banks when the account holder attempts to make a payment, but the bank declines it due to an insufficient balance in the account. It can be charged on checking accounts, checks, debit card transactions, automated payments, and any electronic/online payments if the account is overdrawn.

What to Do If You Have a Pending NSF Fee?

Here’s what you should do:

• Stop using the account: You should avoid making any new transactions using that bank account to prevent further charges until you clear the NSF fee. Repeated bounced payments can be perceived as a red flag by banks, which can lead to account suspension or closure.
• Pay the fees: When the NSF fee is due, the money will be deducted from the existing balance on your account, if any. Or you can deposit funds to clear the negative balance and all accrued fees as quickly as possible.
• Transfer funds: If you have another savings account that has sufficient funds, you should transfer money from it to your at-risk account so it can cover the negative balance. 

Are NSF Fees and Overdraft Fees the Same? 

No, NSF fees apply when you attempt to pay from a bank account with a balance lower than what you need to cover the payment, and the bank declines the transaction. But an overdraft fee is charged when the bank does not deny the payment, and it goes through, but the balance in your account goes into negative due to overdrafting.

Does NSF Fee Impact Credit Health?

A single NSF charge may not affect your credit health. However, not paying the NSF fee, especially for an extended period, can indirectly impact your credit. For instance, when the transaction fails due to insufficient funds, it means you may miss the payment and incur late payment charges. If the payment stays unpaid for over 30 days, it will be reported to the credit bureaus. This can not only damage your credit but can also lead to suspension of your account and other consequences.

What Happens If I Don’t Pay My NSF Fee?

If you owe NSF charges to the bank and don’t pay, it can lead to the following consequences:

• Legal consequences: In some cases, the collection agency or bank could even take legal action to garnish your wages or place a lien for recovery.
• Suspended Account: If you don’t pay the NSF fee after repeated attempts to make new payments, the bank may temporarily suspend your account usage.
• Account closure: If the charges stay overdue for too long, the bank may close your account. 
• Outstanding debt: If you have accumulated NSF fees, along with other charges or debt, and it stays unpaid for an extended period, they may send your account to a collection agency.
• Credit score damage: The collection agency may report the unpaid bills, late payments, and outstanding debt to credit bureaus, which can negatively impact your credit scores. 
• Difficulty opening new accounts: If your account is reported to credit bureaus, it not only damages your credit but also makes it difficult to open new credit accounts. 

How Much NSF Fee Can a Bank Charge?

On average, banks may charge a $20 to $34 NSF fee. However, every bank may have a different NSF fee ranging from $10 to $50. In recent years, many large banks have also waived off NSF fees.

How to Avoid NSF Fees?

• Monitor Your Account Balance 

Track your spending and balance actively. Regularly checking your account balance and keeping track of your transactions can help avoid overspending and budget better for upcoming expenses.

• Don’t Ignore Low-Balance Alerts 

Most banks send automated low-balance alerts. However, some banks may also allow users to set low-balance alerts for a balance limit specified as per their preferences.

• Adjust Bill Due Dates 

If you feel that you might miss a payment due to insufficient balance on a certain day, adjust the bill due date for that expense if possible. This can help you manage until your paycheck comes and avoid a shortfall when automatic payments are due.

• Keep a Buffer Account 

It is recommended to maintain a buffer of a few hundred dollars in your checking account to cover any unexpected expenses.

• Switch to a Bank with Low or No NSF Charges  

There are many banks that don’t charge any NSF fee or have low charges, so you may consider switching banks for the desired benefits.

• Link to Your Savings Account 

Another effective strategy is to link a savings account to your current account and set up overdraft protection so that funds are automatically transferred to cover shortfalls as needed. You can also set up a direct deposit for your paycheck to ensure you have the necessary funds available when your bills are due.

Additional Tips:

• Monitor Your Credit: 

By checking your credit reports regularly, you can discover potential errors or missed payments early—both of which could have serious long-term effects on your credit. Regular credit monitoring can help you find errors or missed payments quickly. By using apps like CoolCredit to regularly monitor your credit, you can track negative items that are lowering your credit scores, and receive the necessary guidance and insights on how to improve/strengthen your credit.

• Dispute Suspicious Charges: 

If your report has any incorrect chargebacks, they can quickly diminish your balance without you even being aware of it, and it also increases your chances of being charged an NSF fee. So, when you check your credit report and see an unrecognised charge, with CoolCredit, you can immediately file a dispute with the credit bureau. Additionally, by reporting to the credit bureau and filing a dispute promptly, you are taking proactive steps to protect yourself from identity theft or fraud.

Conclusion

The NSF fee is a common bank charge that is easily avoidable with the right financial habits. While it may not directly damage your credit score but unpaid NSF fees may have a long-term impact that can affect far more than your wallet.  By keeping track of your balance, adjusting payment schedules, monitoring your credit, and using tools like CoolCredit to stay informed, you can stay ahead of potential problems. 

Building smart financial moves starts today with CoolCredit. Just sign up to maintain a healthy credit, and avoid credit risks.

FAQs

Q: What Is an NSF Fee?

A: NSF stands for ‘Non-Sufficient Funds,’ and when an account holder lacks the funds in their checking account and attempts to make a payment that exceeds the available balance, an NSF fee is charged by the bank.  

Q: What's an NSF Check?

A: An NSF check is when the account holder issues the check, but the account balance is not sufficient to process the check payment, so the check bounces. This can mean the issuer needs to pay an NSF check fee to the bank. Such checks are also called “bounced checks” or “bad checks.”

Q: How Much Is a Typical NSF Fee?

A: Typically, an NSF fee can be between $25 and $35, though some banks may charge a lower NSF fee of under $20, whereas nowadays many large banks don’t charge any NSF fee or overdraft fees.

Q: Is the NSF Fee Legal? 

A: Yes, the NSF fee is generally legal, but with specified limitations on how much a bank can charge. However, if a bank is charging exorbitant fees, you may be able to take legal action if they are charged as undisclosed/hidden fees. 

Q: Do All Banks Charge NSF Fees?

A: No, not all banks charge an NSF fee. In fact, many large banking institutions have eliminated or reduced it significantly. However, small banks may charge an NSF fee, so it’s best to check your bank’s policies.

Q: Do NSF Fees or Overdue Fees Impact Credit?

A: You typically have 45 days to repay the overdrafted balance, or your account may get suspended and reported to the credit bureaus. Hence, overdraft fees can directly impact your credit if left unpaid. However, NSF fees may not directly impact your credit, while the consequences of late payment, accumulated overdue balance, and other debt may lead to a negative mark on your credit report.