As a banking customer, you've probably heard of NSF (non-sufficient funds) fees. These fees are charged by your bank when you try to pay a bill or make a purchase, but you don't have enough money in your account to cover it. While they might seem like a minor inconvenience, NSF fees can have a significant impact on your credit score.
Unlike overdraft fees, which are charges for not having enough funds for a transaction, non-sufficient funds fees can indirectly affect your credit score. This is because these fees can cause late or missed payments, which are reported to credit bureaus. What’s more, is that any unpaid debts can be sent to collections and will appear on your credit report for up to 7 years after the date of your last payment.
Surprisingly, many people are unaware how NSF fees can hurt their credit score. But, with proper understanding of how these fees work, you’ll be better equipped on how to minimize their impact on your credit score. In this blog, we’ll explore how NSF fees work and how to avoid them altogether.
Understanding NSF Fees and How They Work
NSF stands for "non-sufficient funds.” This means that you've attempted to spend more money than you have available in your account. When this happens, your bank will charge you a fee - and it’s not cheap! Most Canadian banks charge around a $50 fee for non sufficient funds. This is meant to cover the cost of processing the transaction, and it can add up quickly if you're not careful.
Many people confuse NSF fees with overdraft fees, but the terms are not interchangeable. Your bank can charge an overdraft fee if you don’t have enough funds for a transaction and the bank covers the charge for you. An NSF fee is charged when you’ve overdrawn your account and the transaction has been denied by the bank
Choosing an overdraft protection plan can be expensive. Banks charge their customers monthly or yearly protection fees, but the benefit is to avoid NSF fees. Overdraft protection ensures that transactions can still be processed even when there are insufficient funds in the account by issuing credit for the overdrawn amount.
How Do NSF Fees Affect Your Credit Score?
NSF fees do not directly impact credit scores. However, when you fail to pay an NSF fee, your bank may report it to the credit bureau as a late payment or default. Late payments can stay on your credit report for up to 7 years, and they can cause a drop in your credit score.
Additionally, a default history can prevent you from getting loans or credit in the future. A low credit score often means you are perceived as a high-risk borrower, and lenders may either refuse your loan or charge you a high-interest rate.
To avoid the consequences of an NSF fee, you should always monitor your account balances and avoid spending beyond your means. If you need to make a transaction that exceeds your account balance, consider adding overdraft protection to your bank account. Most banks offer overdraft protection, which covers the shortfall when you don't have enough money in your account.
How to Avoid NSF Fees Altogether
The best way to avoid NSF fees is to keep track of your spending and make sure you have enough money in your account to cover your bills and purchases. Some ways to properly manage your finances and ensure you won’t incur any NSF fees are listed below:
1. Check your account balance regularly
Ensure that you’re regularly checking your account balance, including any new deposits, withdrawals, transactions, automatic payments, etc. You should also note any upcoming payments or pending transactions that may not instantly reflect your account balance in real time.
2. Use a budgeting app to help you track your spending
Sticking to a monthly budget can be critical to your financial success, especially if you’ve ever been tacked with hefty NSF fees. When it comes to building a budget, there are many online budgeting tips and friendly apps that can help keep you on track. Once you’ve found a resource that works for you, stick with it. You’ll be surprised at how helpful it can be when staying on top of your finances.
3. Set up low-balance alerts
If you’re concerned about not having enough funds in your bank account to cover certain payments, you can set up text alerts for when your balance reaches a certain minimum. This will give you prior notice before having to worry about being declined a transaction and incurring any associated fees.
4. Use cash instead of a credit card whenever possible
Although the digital world has made it much easier to purchase with a simple tap, it can become much more expensive overtime. Digital spending gives you less control over the purchases you make and can also lead to extra charges and fees.
For example, if you exceed your credit limit or fail to pay your balance in full each month, the added fees and interest you incur on your purchases will end up costing you much more than the original purchase. Using cash, on the other hand, can give you more control over your purchases, as you consciously know how much is leaving your wallet.
How to Minimize the Impact NSF Fees Have on Your Credit Score
If you've already incurred NSF fees and they've negatively impacted your credit score, don't worry - there are still ways to improve your score over time. Here are a few things you can do:
1. Pay the fee off as soon as possible
If you have a monthly pre-authorized bill, for example, and forget to deposit money into your account to cover the charge, you’ll be charged an NSF fee. If this happens, make sure to pay off the fees as soon as possible. The longer you wait, the more prone you’ll become to late fees or service cancellations, or worse, your account may be turned over to a collection agency.
2. Ask your bank to waive the fees
You can also try calling your bank’s customer service department and asking if they'll waive the fees. Some banks will do what is called an NSF reversal as a courtesy if you're a long-time customer in good financial standing.
If you’re unsure how to start the process, follow these simple tips:
Contact the right person by calling the bank and asking to speak with a customer service representative.
Clearly explain your situation and be ready to provide any requested documentation so that your request can be handled promptly.
Explain that you were charged with an NSF fee as a result of an honest mistake and provide any documentation that demonstrates your commitment as a loyal customer i.e. evidence of recent bill payments made on-time.
3. Check your credit report regularly and dispute any errors
Your credit score is one of the most important factors when it comes to determining your creditworthiness. That’s why it’s essential to make sure your credit report is up-to-date. You can use a credit monitoring service like Credit Karma to properly keep track of everything and dispute any errors immediately.
4. Pay all of your bills on time
Staying on top of your monthly or bi-weekly bill payments and making sure they are paid on time will help raise your credit score faster, especially if it’s been indirectly impacted from previously incurring NSF fees. This also helps ensure that all of your debts are accounted for and shows potential lenders that you’re a responsible borrower who can manage payments in a timely manner.
Avoid NSF Fees When You Borrow with iCash
NSF fees might seem like a minor inconvenience, but they can have a significant impact on your credit score. By taking steps to avoid these fees and paying them off quickly if you do incur them, you can minimize the damage to your credit score. There are even alternative borrowing solutions, like iCash, that provide small loans for people with bad credit with flexible repayment options. You could borrow up to $1,500 to cover any upcoming bill payment, all while avoiding NSF fees and the negative consequences they come with.
