What Is a Returned Payment Fee?

Quick Answer

A company may charge a returned payment fee if you don't have enough funds in your bank account to cover a payment and your bank declines the transaction.

A man sitting in kitchen at home entering credit card number on tablet device. Credit card is declined or out of limit.

A returned payment fee is a charge that occurs when a payment bounces due to insufficient funds or other reasons. Returned payment fees can be costly on their own, but they can also be accompanied by other charges.

Here's what to know about how returned payment fees work and how to avoid them.

What Is a Returned Payment Fee?

When you schedule a payment for a loan, credit card, utility or insurance bill, you likely intend for the payment to go through. If your bank or credit union doesn't honor the payment, however, you may be assessed a returned payment fee.

The most common reason for a returned payment is that you don't have sufficient funds in your bank account and lack overdraft coverage. It can also happen if your bank account is closed or if you provided incorrect account information. Note that locking your debit card won't affect your payments.

How Much Is a Returned Payment Fee?

Returned payment fees often range from $25 to $40, but it's not the only cost you may incur if a payment doesn't get processed as planned. Other potential costs include:

  • Nonsufficient funds (NSF) fee: If your financial institution declines a payment due to insufficient funds, your bank account may be subject to an NSF fee. Fortunately, most major banks no longer charge this fee, but many credit unions still do. The average NSF fee is $34, according to the Consumer Financial Protection Bureau.
  • Credit card interest: Credit cards typically offer a grace period between your monthly statement and due dates. When you repay your balance in full during the grace period, you won't be charged interest on your balance. But if you have a payment returned and miss your due date, your card issuer may assess interest and revoke your grace period until you pay off your balance.

Here's an example of how a returned payment fee might be charged: Let's say you have automatic payments set up to pay off your full credit card balance each month. However, on the date of a scheduled payment of $1,500, your checking account balance is $1,000.

If you don't have overdraft protection or coverage and your bank declines the transaction, your card issuer may charge a returned payment fee and your bank can charge an NSF fee. If you also missed your payment due date, your card issuer will also assess interest on your balance and charge interest on new purchases that aren't eligible for the grace period until you pay off the full amount.

How Does a Returned Payment Fee Affect Your Credit?

Returned payment fees by themselves won't impact your credit score in any way. However, 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 scores, so it's important to get caught up as quickly as possible if a payment is past due.

Utility companies typically don't report missed payments. But if you fail to pay your bill for several months, a provider may send your debt to a collection agency, which would report the past-due amount to the credit bureaus.

How to Avoid a Returned Payment Fee

If you've recently been charged a returned payment fee, contact the lender, utility company or insurer. If it's your first time missing a payment, you may be able to get the fee waived, especially if you have a long history of on-time payments.

There are no guarantees, though, and it's crucial that you take steps to avoid the possibility of a returned payment fee in the first place. Some ways you can do this include:

  • Maintain a buffer in your checking account. While it's best to keep track of your balances and transactions to avoid the situation, expenses can fluctuate from month to month, so it can help to maintain even just a small buffer in your checking account to avoid returned payments and overdrafts.
  • Align your due dates. Many lenders, utility companies and insurance providers allow you to adjust your payment due date, allowing you to align it with when you receive your paychecks. This can help ensure that you always have enough funds in your bank account to cover your obligations.
  • Keep track of all recurring payments. While many payments occur monthly, you may have certain payments that occur quarterly, semi-annually or annually. Consider setting up payment reminders, so you'll always be on top of your obligations, regardless of how often they come due.
  • Set up overdraft protection. Depending on your bank or credit union, you may be able to link a savings account, line of credit or even a credit card. If you overdraft your account, your financial institution will automatically transfer funds from the linked account to cover the negative balance. Just keep in mind that some institutions may charge a fee.
  • Ensure that you enter your bank account information correctly. Many financial institutions will verify your bank details when you enter them to ensure that they're accurate. But that may not be true of all service providers, so it's crucial that you double-check any bank account information you enter for payments for accuracy.

The Bottom Line

Having a payment returned can be costly, especially if it triggers multiple fees and interest charges. While mistakes can happen, even with the best intentions, it's important to keep track of your income and expenses, particularly recurring payments, to ensure that you always have enough money to cover your obligations.

If you do have a payment returned, rectify the situation as quickly as possible, and also reach out to your financial institutions to see if you can get a break on the fee. While it's not a sure thing, it can be worth trying if you're a long-time faithful customer.