What is Insufficient Funds?
“Insufficient funds” is a checking account status where the balance is deficient. It is a banking term that may appear as a notice in bank statements or receipts.
The insufficient funds status describes the scenario where a checking account does not hold sufficient funds to cover transactions.
How Does Insufficient Funds Work?
Insufficient funds happens when there is either the availability of funds below the required funds to offset a payment, or where a given account has no funds in it, and as such cannot offset any payment. Summarily, it occurs where there is a lack of funds in a given account to offset any payment demand.
Situations abound where the query “insufficient funds” arises, but one of the more peculiar ones is when there is yet to be settlement of fresh funds deposited into an account, which results in an unrefreshed account balance and a denial of payment demands within the period of the unsettlement of fresh funds that has already been deposited. In situations where payment is to be made irrespective of the insufficiency of funds in an account, certain penalties are used by banks to help customers in such situations.
Bank overdraft policies give account holders the liberty to cover some purchases in case of insufficient funds. In this case, the account holder authorizes the bank to settle the payment while attaching a $35 NSF fee which would be paid upon fresh deposit of funds into the account holder’s bank account. However, this option is solely based upon the choice of the account holder and such a person can choose to reject the overdraft without incurring the penalty NSF fee.
In cases where the insufficient funds query occurs when a check is drawn, the customer can be charged by the company being paid. Here, such customer pays a returned payment fee which is a matter of policy, and if there is a recurring payment associated with an account and the payment mode is declined due to insufficient funds, then account holder can also be charged a late fee for missing the payment.
Why do banks charge for insufficient funds?
There are some reasons behind the bank charges by the bank
- Sometimes, the funds deposited in an account may not be fully settled, causing a lower than estimated balance.
- When the bank provides the overdraft facility to the drawer but the drawer decline to pay due to insufficient fund then the bank charges apply.
- The bank charges for insufficient funds to encourage customers to maintain good credit habits and should only issue cheques when they have funds in the Account.
- And further, they have to answer and may have to service the client of other banks’ desires in order to start a lawsuit against you.
- Banks want good clean customers not people who become headaches and bring a bad name to the bank.
- The banks spend money to provide services to their customers.
- If you are not using their services then you are a burden on the banks.
- They are not here to do charity work. Sure, they are backed by the government but at the end of the day, they have to make profits.
- This is the penalty to stop this next time.
- Charges for issuing a cheque, after all, there is no balance in the account.
Fees Related to Insufficient Funds
The insufficient funds status often incurs additional fees to account holders. The charges can be insufficient funds fees or overdraft fees. Hence, account holders should be cautious about their account balances to avoid such fees.
Insufficient Funds Fees
An insufficient funds fee is charged by the bank as a penalty when a payment presented by check is refused due to insufficient funds. In the U.S., the fee is from $27 to $35 conventionally. Account holders can avoid such fees by linking another account, such as a credit card or a savings account, as a backup source of funds.
Insufficient funds may also end up with an account overdraft. Account holders can opt-in overdraft policies when opening their bank accounts or request the bank for an overdraft when the insufficient funds status occurs. In such a situation, the bank will accept the check and overdraw the checking account.
For example, an individual with $100 in his checking account but made an electronic check payment of $150 for his video streaming subscription. According to the embedded overdraft policy, the bank will allow the payment to flow through and overdraw the account balance to -$50. An overdraft fee will also be charged, further reducing the account balance.
Many banks offer the overdraft line of credit to customers, which helps to cover any transactions with insufficient funds up to a certain amount. Applicants need to meet certain credit score and credit profile requirements for approval.
Legal Concerns of Insufficient Funds
“Insufficient funds” not only results in additional fees but can also cause legal concerns. Knowingly issuing multiple bad checks or in large values may lead to criminal charges. In some jurisdictions, the criminal charge for insufficient funds involves fraud.
In the U.S., many jurisdictions oversee bad check restitution programs (BCRPs) to deal with insufficient funds checks. The program allows recipients of such types of checks to collect money from local attorneys in their districts. The local agencies will follow up with check writers to collect the funds, and check writers can avoid criminal charges by making the payments in exchange. Typically, all the charges can be dropped if the bad check writers can make up their payments within six days.