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In the financial world, various fees and charges can affect your account balance and financial future. One such fee is the Non-Sufficient Funds (NSF) fee. This article explores everything you need to know about NSF fees and overdraft fees in Canada, and how you can take steps to avoid incurring unnecessary fees. A brief overview of the article includes:
- What are NSF fees, and how do they occur?
- How can NSF fees affect your credit score?
- What is the difference between an NSF fee and an overdraft fee?
- The costs of NSF and overdraft fees.
- How to avoid unnecessary NSF fees.
- Frequently asked questions.
What are NSF Fees?
Non-Sufficient Funds (NSF) fees, also known as bounced cheques, are charged when you attempt to make a transaction that exceeds the balance in your account. These fees are a penalty for spending more than you have, and they are typically quite high, costing up to $50 per transaction in Canada.
How do NSF Fees Occur?
There are various ways to incur an NSF fee. For instance, writing a cheque that gets cashed for more money than you have available in your account, or when an electronic payment automatically deducts from your account despite insufficient funds.
NSF Fees And Credit Score
NSF fees can have a significant impact on your account balance and your overall financial health. Incurring an NSF fee can have far-reaching consequences for your credit. While bounced cheques aren’t directly reported to credit bureaus, the resulting late or missed payments can be. When your bank denies an automatic transaction due to insufficient funds, regular transactions such as rent, mortgages, and car payments don’t go through as scheduled, resulting in overall worse credit.
Unpaid debt due to NSF fees can be sent to collections, which will appear on your credit report. This lowers your chances of being approved for a credit card or loans, as unpaid debt appears to be a credit risk to lenders.
Difference between NSF Fees and Overdraft Fees
NSF fees and overdraft fees are terms often used interchangeably, but they have important differences. Both are penalties for overdrawing your account, but an overdraft fee occurs when the bank pays for a transaction as a courtesy when you have insufficient funds, and an NSF fee occurs when an outgoing payment is denied because of insufficient funds.
Understanding Overdraft Protection
An overdraft is like a small loan from the bank – it temporarily extends your credit beyond what you have, protecting your account from being overdrawn. However, the fee on this is the interest you pay back to the bank for this service. If you use your overdraft, you’ll be charged daily interest (around 21% per annum) until you repay the overdrawn amount.
Fees for Overdraft Protection
The fee for using overdraft protection depends on the type of plan you choose from your bank. You could be charged a per-use or per-month rate, in addition to interest on the overdrawn balance.
Banks differ in terms of the types of overdraft protection they offer, however, overdraft protection is generally an additional service you need to sign up for. There are also overdraft protection services that transfer money out of a savings account into your chequing account if there are insufficient funds in it. So be sure to read up on your bank’s policy around overdraft protection!
How Overdrafts Can Affect Your Credit Score
While NSF fees do not directly affect your credit score unless your regular payments are interrupted, overdraft protection fees may pose a more direct threat to your credit. Since overdraft protection is essentially a small temporary loan from your bank and requires you to pay back the amount with interest, if you fail to pay it back in time the bank may hand over your information to a debt collection agency. This will ultimately affect your credit score, so ensure it doesn’t get to this point if you can avoid it.
The Typical Cost Of NSF And Overdraft Fees
So is there a difference in cost between NSF fees and overdraft fees? Or is one as bad as the other? In Canada, the most typical costs of these fees are as follows:
Typical NSF fee: $45 fee, however, this changes depending on the bank and ranges from $45 – $65, so be sure to check this with your bank.
Typical overdraft fee: $35 per transaction, or $5 per month depending on your overdraft protection plan. Some banks also offer pay-as-you-go overdraft services.
Based on this, it seems that despite both fees being steep, overdraft protection may be slightly cheaper in the long run if you regularly have insufficient funds in your account. However, signing up for overdraft protection is not necessarily a sustainable solution if your goal is to build up good credit. The next section goes over your options regarding what options you have available to ensure you get hit with as few unnecessary fees as possible.
How To Avoid NSF Fees
There are several strategies you can use to avoid NSF fees. These include:
Signing up for overdraft protection – however, this comes with potential overdraft fees.
Regularly monitoring your bank account balances: Sometimes your bank account runs low without your knowledge. Checking your account balances at regular intervals ensures you know exactly how much is available to spend when you need it.
Budget well: Be aware of your monthly debit orders and average budget for living expenses, such as groceries and leisure activities. This way you can keep enough money in your chequing account to ensure you have enough to cover your budgeted spending without risking an overdraft or NSF fee.
Setting up alerts for low balances: Some banks offer an alert service to let you know when your bank balance gets below a certain level. After each transaction, your bank can also send you a message containing your remaining balance.
Using a prepaid credit card: Prepaid credit cards do not incur NSF or overdraft fees, as they are limited to only spending what is loaded onto them.
In special circumstances, you can get your NSF fees waived.
Getting NSF Fees Waived
In some cases, your bank might agree to waive or refund an NSF fee, so don’t hesitate to call your bank. If this is your first time incurring an NSF fee, or if there were extenuating circumstances, they may agree to waive this fee.
FAQs
Q: What are NSF fees?
A: Non-sufficient funds (NSF) fees are charged when your account does not have enough money to cover a transaction.
Q: How can I avoid NSF fees?
A: You can avoid NSF fees by monitoring your account balance, tracking your spending, setting up low balance alerts, and using a prepaid card or overdraft protection.
Q: Can NSF fees be waived?
A: Yes, some banks may waive or refund an NSF fee, especially if you have a good account history and the NSF charge was an isolated incident.
Q: Do NSF fees affect my credit score?
A: While NSF fees themselves don’t directly affect your credit score, the resulting late or missed payments can be reported to credit bureaus, which can negatively impact your credit score.
Q: What is overdraft protection?
A: Overdraft protection is a line of credit that extends your account balance, allowing you to overdraw your account up to a certain limit.
Q: Which is more costly – overdraft protection fees or NSFs?
A: NSF fees are more costly overall if you regularly have insufficient funds in your account, overdraft protection may save you money in the long run depending on your bank.
The Future Of NSF Fees In Canada - A Hopeful Solution?
Overdraft fees and NSF fees can be tricky to navigate, and worrying about insufficient bank balances can be exacerbated by the resulting NSF fees from declined transactions. While it’s easier said than done to always have sufficient funds in your chequing account to avoid NSF fees, life can be unexpectedly costly, and doing your best to stay prepared for expenses is always a wise decision. Signing up for overdraft protection is one option, calling your bank to ask about waiving NSF fees is another.
There is a glimmer of good news regarding NSF fees in Canada, however. On October 17, 2023, the Canadian Department of Finance announced its intention to lower NSF fees in major Canadian banks sometime in the near future. Whether this step goes forward or not remains to be seen, but for those living paycheque to paycheque, lower NSF fees will likely be a welcome step.
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