Here’s a surprising stat to put overdraft charges in perspective:

Now, on to the answer to the question. From Deposit Accounts:

Two of the most commonly charged banking fees are the Overdraft Fee (OD) and Nonsufficient (Insufficient) Funds Fee (NSF). Many consumers consider these fees one and the same, and many financial institutions practically treat them as such, but a difference technically exists. An overdraft fee is charged when an account lacks the funds to pay a debit levied against it – e.g., a check written that is larger than the balance of the account – and the institution covers the overdraft. Hence, “Overdraft Fee,” otherwise commonly called a “Courtesy Pay” fee for the courtesy of covering the overdraft amount. This fee is not to be confused with the overdraft transfer fee (which we will touch on later in the article); this is simply the fee charged for overdrawing an account, the amount of which is covered by the bank.

Banks limit how much they will cover in overdraft protection, but it varies by institution. In some cases, extra fees may also be charged if the account remains overdrawn. This sort of protection costs the consumer a fee paid to the bank; but, since the debit is paid, it saves him or her a returned-check fee (and potentially some embarrassment and additional hassles) from the original recipient.

An NSF fee, like the OD fee, comes on the heels of a debit that overextends an account. The difference is that the debit is not paid with NSF as it is with OD. This type of transaction is colloquially known as a “bounced check.” If a consumer has opted out of overdraft protection (more to come on this) or has exceeded the limits of said protection, a check written by that consumer for which the account has insufficient funds is returned unpaid to the original recipient’s bank. The consumer’s financial institution charges him or her a fee for having written a check from an account that had nonsufficient funds. Hence, “NSF Fee.” As we’ll see subsequently, this amount is, in practice, often very similar or even identical to the OD fee.

Here are some graphs from a separate Deposit Accounts article that show the average cost for overdraft fees across different bank types as well as the distribution of these fees:

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.