Learn what a returned payment fee is, how it can impact you, and discover effective strategies to avoid them altogether!

Have you ever encountered a situation where your debit card payment bounced, or a scheduled automatic bill payment failed due to insufficient funds? If so, you might be familiar with the dreaded returned payment fee, a financial penalty levied by your bank or the merchant for a declined transaction.

So, in order to save you money and keep your finances on track, we are going to help you understand what it is, how it works, and how to avoid it altogether. Also, if you want to check out more financial tips on our website, you can click on this link!

What Is a Returned Payment Fee?

It is a charge assessed by your bank when your account lacks to cover a transaction. Keep in mind that, it can occur for various reasons, not only when there’s a lack of sufficient funds, such as:

• Insufficient Funds: this is the most common scenario. It happens when there’s a lack of money to pay or repay bills;
• Account Closure or Inactivity: if your account has been closed or becomes inactive, debits or automatic payments might be declined;
• Expired Debit Card: using an expired debit card will trigger a decline;
• Authorization Errors: occasionally, technical glitches or authorization errors can lead to a declined transaction.

How Much Is The Fee?

The amount of the fee can vary depending on your bank’s policy. It typically ranges from $25 to $40 per instance, but some banks might charge other fees. These potential costs include:

• Non-Sufficient Funds (NSF) Fee: if your financial institution declines a payment due to insufficient funds, your bank account may be subject to an NSF fee, with its average being $34, according to the Consumer Financial Protection Bureau. Although most major banks no longer charge this fee, many credit unions still do.
• Credit Card Interest: many credit cards offer a grace period, between your monthly statement and due dates. If you can manage to pay your entire balance during this period, you’ll avoid interest charges on your purchases. However, if a payment doesn’t go through and you miss the due date, your credit card issuer can start charging interest.

Imagine you have automatic payments set up to clear your credit card balance each month. But on the payment date for a $1,500 bill, your checking account only has $1,000. Without overdraft protection, your bank might decline the transaction.

This could result in a returned payment fee from your credit card issuer and a non-sufficient funds (NSF) fee from your bank. On top of that, missing the due date means you’ll be charged interest on your existing balance, and any new purchases won’t qualify for the grace period until the full amount is paid off.

How Does a Returned Payment Fee Affect Your Credit Score?

The good news is that returned payment fees generally do not directly impact your score, as they are not usually reported to credit bureaus. However, there are some ways it can affect your credit score:

• If you have a payment returned and you don’t make up the payment within 30 days of your due date, the lender may report the missed payment to the credit bureaus;
• Even a single missed payment can have a significant negative impact on your credit score;
• Your bank might close your account to mitigate their risk. A closed account in negative standing can stay on your credit report for up to seven years, potentially lowering your score;
• If you fail to pay your bill for several months, your debts could be sent to a collection agency, which would report the past-due amount to the credit bureaus.

How to Avoid a Returned Payment Fee?

• Monitor Your Account Balance: regularly check your bank account balance online or through your bank’s mobile app. This helps you stay aware of your current funds and avoid overdrafts;
• Set Up Low-Balance Alerts: many banks offer the option to set up alerts that notify you when your account balance falls below a certain threshold. This can be a helpful reminder to transfer funds or avoid making unnecessary purchases;
• Link Your Checking and Savings accounts: if your bank allows it, link your checking and savings accounts. This ensures that if your checking account lacks sufficient funds, the bank can automatically transfer money from your savings to cover the transaction and prevent a returned payment fee;
• Review Automatic Debits and Payments: carefully review your automatic debit and payment schedules. Ensure you have enough funds available in your account to cover these recurring transactions on their designated dates;
• Communicate With Your Bank: if you anticipate a potential shortage in your account that might lead to a returned payment, contact your bank beforehand. They might be able to offer temporary solutions like a courtesy overdraft or a line of credit extension (subject to approval and fees);
• Consider Alternative Payment Methods: for planned purchases you know might be close to your account limit, consider using a credit card (but remember to pay the balance in full by the due date to avoid credit card interest charges). Opting for cash or a debit card with sufficient funds ensures you only spend what you have available.