What Is A Returned Check Fee?
Payment Processing Expert | More
Merchants reviewing their billing statements often ask in frustration, “What is a returned check fee?”
A returned check fee, also known as a bounced check fee or NSF fee, is a fee that a bank or credit union will charge when a written check is returned due to insufficient funds in your bank account. Unfortunately, it may be compounded with fees from other institutions, causing even more financial stress.
While returned check fees are common, they are also preventable. This article will explain what they are, their overall costs and consequences, and how to avoid them. Adaptiv Payments can not only help you with your bounced checks but also provide straightforward payment processing and financial education that can help prevent these issues.
What Triggers a Returned Check Fee?
A returned check fee, also sometimes called a dishonored payment fee or NSF (non-sufficient funds) fee, occurs when a check you've written "bounces" because there isn't enough cash in your account to cover it.
Several situations can result in a bounced check, such as insufficient funds, incorrect account details, bank holds, and frozen or closed accounts. Recurring payments can also cause bounced checks if they are deducted early.
For example, assume that you wrote a check for $2,000 to cover an invoice from your utility company. You had $1,000 in your bank account and were expecting a $1,500 payment to come in the next day.
However, the payment came one day later than expected, and the utility company tried to cash the check immediately. This would have overdrafted you by $1,000, so the bank bounced the check and charged you a $27 NSF fee. The utility company also charged you a $30 fee. You had to pay $57 in fees because of this mistiming.
Returned Check Fee: Who Gets Charged?
Both parties can be hurt by a returned check, but in different ways.
Payer: The payer’s bank will charge a returned check fee, and the check recipient may charge them for the inconvenience.
Payee: If the payee attempted to withdraw the funds before the bank realized the bad check, they could be charged an overdraft fee or a returned deposit fee. They may also have to pay late fees if they were trying to use those funds for a utility bill or rent payment.
Small businesses that accidentally write bad checks, such as landlords, may charge the payee an administrative fee. If you wrote a returned check to a small business, they may attempt to communicate with you or request a different payment method before sending the account to collections.
Like with many other financial regulations, each state has its own fee caps. Some require companies to disclose all potential charges a client could face, including NSF fees, while others set hard limits. For example, Massachusetts allows a maximum fee of $5 for certain accounts, and Indiana has a limit of $250. Ensure you check state laws so you aren’t overcharged.
Understanding the Costs of Bounced Checks
There are different fees you may have to manage for a bad check. Your bank or credit union charges an NSF fee, while a merchant can charge a fee to help cover their own losses associated with the check. Lastly, an overdraft is charged when the bank decides to honor the check but overdrafts your account.
This is how much the returned check fee costs on average, but each financial institution will have its own fee schedule. Some may also have NSF refund policies depending on the specific circumstances, so you may be able to recoup your losses.
| Type of Fee | Typical Cost | Payee | Typical Fee Range |
|---|---|---|---|
| Non-Sufficient Funds (NSF) Fee | Around $35 (Varies by bank) | Bank | $25 - $40 |
| Merchant Returned Check Fee | Around $30 | Recipient of the check (e.g., store, utility company) | $20 - $40 |
| Overdraft Fee | Around $35 (Varies by bank) | Your Bank (if they cover the check) | $15 - $37 |
While the average NSF fee may not seem too frustrating if the check amount was very high, there are non-monetary costs to repeated NSF incidents
These problems may be reported to the credit bureaus, resulting in a lower credit score. In some cases, the check writer’s account will be frozen, requiring them to open a new bank account or wait until it is unfrozen. You could also be put on a blacklist that makes it difficult to get another checking account.
How to Avoid Returned Check Fees
You can prevent returned check fees - and keep your operations running smoothly - through smart financial management and alternative payment options. Consider these proactive steps to avoid challenging transactions.
Bank Management Tips
Monitor Your Balance: Double-check that you have enough funds in your account to cover the check before you write one, keeping in mind any deposits due soon.
Set Up Balance Alerts: A low-balance alert can warn you to deposit more funds before the check clears.
Use Overdraft Protection: Link a backup account to your checking account with enough funds to cover the balance.
Record All Transactions: Practice good bookkeeping, including noting which checks have been deposited and which are still pending.
Use Cashier’s Checks Instead of Personal Checks: A cashier’s check is immediately debited from the account holder’s funds and is backed by the bank, so it is less likely to bounce. Many banks offer these as a courtesy.
Familiarize Yourself With Your Bank’s Policies: See if they return NSF fees and what penalties you may face. Explore different banks to see which ones have policies that align with your needs.
Cancel Recurring Payments: If you are worried about overdrafting, then quickly cancel any recurring payments to avoid returned check fees.
Alternative Payment Methods
US News and World Report notes that the US government has stopped writing checks for Social Security, demonstrating the decline of checks as a common payment method. While many still rely on them on occasion, the high fees and penalties mean they may be a riskier payment option than other choices.
One reason checks have become unpopular is that they take a long time to clear, meaning some people with less stable cash flow may not have enough funds in their account to cover the check by the time the payee deposits it. Newer payment methods eliminate this concern, such as the following.
Electronic Payments: Consider digital wallets like Zelle or Venmo. You typically hold transfer funds in a specific account to be used for your payments, ensuring you always have money in reserve to cover the check.
ACH Transfers: Most traditional banks allow you to directly send money from one account to another using routing and account numbers. While this takes a bit longer than electronic payments, it is also more secure.
Credit Cards: While many use credit cards to improve their scores with credit reporting agencies, they also offer additional protections for both payers and payees.
Debit Cards: Funds may not be taken out instantaneously from your checking account, but they tend to clear much faster than a check. You can also see your balance at a glance and track pending transactions.
Decoding Returned Check Fee Policies
When choosing a bank to work with, you shouldn’t just consider how much you’ll have to pay upfront, but what these fees suggest about the company’s financial health.
A company with low fees may have a high Return on Equity (ROE), meaning that they are using their investments wisely and don’t need to rely on fees to manage their funds. One with high fees may have issues with payment processing, or primarily work with high-risk customers who have unstable incomes.
To understand what this all means, you need to look beyond the actual price tag and look at the returned check fee policy itself. Look for how penalties are imposed, what conditions trigger the penalty, and what adverse actions the bank may take beyond a simple fee.
For example, if it frames the fee as an administrative cost, and the fee itself is on the lower end, this suggests the bank is financially solvent. If the fee is framed as a deterrent against financial instability, this could be a warning sign that the bank is having trouble with its management structure.
Compare different policies to understand what penalties you may face, and support this determination with publicly available information about bank revenue and investments. This can ensure that you’re not being overcharged for a simple mistake - and that the financial institution isn’t likely to collapse soon.
What Happens If You Don’t Pay a Returned Check Fee?
Beyond bank fees, bouncing a check can trigger other negative consequences. Your bank may close your account, and you could be reported to check verification systems like ChexSystems, making it difficult to open new accounts in the future. Negative information stays on ChexSystems for up to five years after being added.
Furthermore, merchants might refuse to accept your checks in the future. To avoid these issues, carefully track your account balance, consider overdraft protection options, and explore alternative payment methods like debit cards or online transfers.
Legal Consequences of Bounced Checks
Repeatedly passing bad checks is considered check fraud and can have serious consequences, including civil penalties and criminal charges.
For a small check, you may get sued in small claims court by the payee. However, a larger bounced check may be a felony with potential jail time. The threshold from misdemeanor to felony varies by state; for example, in California, it is $950, while in other states it may be as high as $1,500.
To avoid charges, you may be able to participate in a bad check diversion fund, which collects restitution plus any statutory fees in exchange for preventing prosecution. With a criminal case, the court demands you pay everything back, plus administrative expenses.
How Returned Check Fees Differ Between Banks
Some online banks have entirely eliminated NSF fees, making them a more affordable option. On the other hand, traditional US banks charge between $25 and $40, which can be very high if you frequently use checks.
Credit unions tend to have slightly lower fees, with an average of around $28 compared to a bank’s $30. This may be a good option if you want all the benefits of traditional banking but without the high costs.
Alternatives to Writing Checks
Checks are still a valuable part of the financial infrastructure, but they also carry more risk. Modern payment methods avoid bounced check issues and offer superior benefits, such as the following.
| Payment Method | Primary Benefit | Good For |
|---|---|---|
| Debit Cards | Instant balance visibility | Small, everyday purchases |
| ACH Transfers | Improved security, lower fees and faster processing | Larger expenses |
| Credit Cards | Added security and improved credit score | Larger expenses paid over time |
| Mobile Wallets | Low or no fees and immediate availability | Small, everyday purchases |
| Digital Invoicing | Improved financial recording | Larger, project-based expenses |
Conclusion
A bounced check fee occurs because you didn’t have enough cash in the associated account. This can cost you $65 or more per transaction, making it essential to prevent them through good financial management and alternative payment options. By staying proactive and using digital payment tools like Adaptiv Payments, you can keep your account in good standing and avoid serious repercussions.
FAQs about Returned Check Fees
What’s the difference between a returned check fee and an overdraft fee?
A bounced check fee is when the bank refuses to honor the check and charges you for the administrative burden, while an overdraft is when they honor the check, resulting in a negative balance.
How long does a returned check stay on my record?
It typically stays on your record for up to five years.
Can I get a refund for a returned check fee?
Sometimes, yes. You will need to call the bank and request a waiver, explaining the circumstances behind the bounced check.
How can I dispute a returned check fee with my bank?
Contact the bank and request a waiver with appropriate documentation, including your good standing.
What should I do if a check bounces due to a bank error?
In this case, you should communicate with the payee and open a dispute with the bank.
