Insufficient Funds (NSF) – Definition

Cite this article as:"Insufficient Funds (NSF) – Definition," in The Business Professor, updated November 29, 2018, last accessed October 19, 2020, https://thebusinessprofessor.com/lesson/insufficient-funds-nsf-explained/.

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Insufficient Funds Definition

Insufficient funds, as the name implies, is a situation where a particular account does not have enough funds, capital or resources in it to offset a particular payment request. Besides being called “bouncing a check”, it is also known by the acronym NSF which stands for “non-sufficient funds”.

A Little More on What is Insufficient Funds

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.

How to Avoid Penalties

A number of options are available to bank customers to help them steer clear of penalties involved in transactions with the insufficient funds query. Easiest and basic of all is that, account holders can choose not to select the overdraft policies that result in bank taking care of the payment with an additional NSF fee.

Besides, not choosing the overdraft policies available, account holders can link up a backup savings account to their main account such that in situations where the main account lacks sufficient funds for a payment, the remainder of the funds for the payment can be directly withdrawn from the backup account.

Another option which can be considered by account holders, is the application for special overdraft policies that give such an account holder the liberty to cover issues concerning insufficient funds up to a certain limit. Here, the customer needs just to apply for credit that takes into account their credit scores and profile for either approval which would grant the account holder an extendable line of credit up to $1000 or rejection which would not offer any credit nor call for a fee from the account holder.

Where the application is approved, the nee credit account is linked up to the account holder’s main account and is automatically used to cover any transaction that brings up the insufficient funds query. It can be said to be a form of backup just in case the customer’s backup account also lacks in funds.

Although this attracts its own fee, it is relatively less expensive than paying individual NSF fee for each transaction that brings up an insufficient funds query.

References for Insufficient Funds

https://www.investopedia.com/terms/i/insufficient_funds.asp  https://www.thebalance.com/insufficient-funds-315343

https://en.wikipedia.org/wiki/Non-sufficient_funds

Academic Research on Insufficient Funds

 

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