What Is a Returned Item Fee and How Can You Avoid It?
Understand the often-overlooked returned item fee and implement smart strategies to keep your bank account secure.
A returned item fee is a charge levied by financial institutions when a payment cannot be processed due to various issues with the payer’s account. These fees are a common aspect of personal finance, often encountered when a transaction attempts to withdraw funds that are not available. Understanding these charges can help individuals manage their bank accounts more effectively and avoid unexpected costs. This overview clarifies what these fees entail, their common causes, and strategies to prevent them.
Understanding Returned Item Fees
A returned item fee is a charge imposed by banks or credit unions when a payment, such as a check, electronic transfer, or debit card transaction, fails to clear. This occurs because the account lacks sufficient funds or has other processing impediments. Financial institutions levy these fees to compensate for the administrative effort and risks associated with handling transactions that do not complete successfully, including processing costs for managing the failed payment.
Common alternative terms include “Non-Sufficient Funds (NSF) fees” or “bounced check fees.” While these terms are often used interchangeably, an NSF fee specifically refers to a charge when funds are insufficient and the bank returns the item unpaid. Overdraft fees, by contrast, are charged when a bank covers a transaction despite insufficient funds, leading to a negative balance. The amount of these fees can vary significantly by institution, and some larger banks have eliminated NSF fees, though many financial institutions still charge them.
Common Causes of Returned Items
Several scenarios can lead to an item being returned and a fee being incurred. The most frequent cause is insufficient funds (NSF), which occurs when the account balance is lower than the transaction amount. This prevents the payment from clearing, resulting in the item being “bounced” back to the payee.
Other reasons for a returned item include:
An account being closed, meaning the account used for payment is no longer active.
A stop payment order, issued by the account holder to prevent a specific payment from being processed.
Signature discrepancies, where the signature on a check does not match the one on file with the bank.
Checks presented too early (post-dated) or too late (stale-dated) according to their written date.
Incorrect account details, such as an invalid account number provided for an electronic transaction.
Managing Returned Items and Avoiding Fees
When an item is returned, consequences extend beyond the fee charged by your bank. The payee, such as a merchant or biller, may also charge their own returned item fee. They might attempt to re-deposit the payment, potentially leading to additional fees from your bank. While a single returned item typically does not directly impact your credit score, repeated instances, especially if they lead to unpaid debts being sent to collections, can negatively affect your financial standing. Your bank may also report repeated incidents to specialized consumer reporting agencies like ChexSystems, which can make it difficult to open new bank accounts.
To prevent returned item fees, monitor your account balances regularly and track pending transactions. Setting up overdraft protection is a proactive measure. This links your checking account to a savings account, another checking account, a money market account, or a line of credit. If your checking account balance falls short, funds are automatically transferred from the linked account to cover the shortfall, often for a smaller transfer fee than a returned item fee.
Utilizing account alerts provided by your bank can also help. These notifications inform you of low balances or large transactions, allowing you to address potential shortfalls before a payment is attempted. Maintaining accurate records of all deposits and withdrawals is another effective strategy to ensure you always have a clear picture of your available funds.
If you anticipate a payment might be delayed or returned, communicating proactively with the payee can help avoid additional charges and maintain a good relationship. Reviewing your bank’s specific fee schedules and policies, including their overdraft and returned item policies, is also beneficial.