Overdraft: Can It Affect Your Credit Score

Overdrafts allow you to spend more money, up until a limit predetermined with your bank, than what you have in your account. Here, you just have to pay interest on the money you use. Once you overdraw without setting a limit bank first or go over the limit, you might have to pay a higher rate of interest or a penalty charge.

Also, your bank could charge you a fee for handing you a reminder letter, and for any cheques or direct debits you put to your account. Until you pay off the overdraft, the bank might freeze your bank account. 

Thus, you couldn’t get access to your account’s money. Moreover, what does an overdraft mean for your credit score? In this post, we’ll walk you through what happens to your credit score if you overdraft. Take a read!

How It Impacts Your Credit Score?

Have you ever asked yourself, why do banks charge overdraft fees? Well, overdraft fees are charged when a withdrawal or payment from your bank account goes beyond the available balance, and the bank compensates for the transaction because of the overdraft protection service.

However, apart from covering the transaction, the credit union or bank then applies the fee. Take note that your bank account information is not always reported or disclosed to the credit bureaus. It’s because you are spending or splurging your own money, not the money you have borrowed. 

The good news is that bank overdrafts will not impact your credit score provided that you resolve them within a reasonable time frame. As soon as you repay the overdraft amount and have a zero balance in your account, you can then continue to use your bank account as normal. 

But if you fail to tend your negative overdraft balance, it might be sent or issued to a collection agency for necessary action. Then, debt collectors will handout the account to the credit bureaus, which will be included in your credit report. 

Furthermore, the collection from your overdraft will influence your credit score. Collection accounts will stay on your credit report for about seven years, even after you have repaid it unless you ask to remove it by negotiating with the collection agency.

Using a Check to Pay Your Credit Card

Did you know that if the check you wrote to pay your credit card is acknowledged as non-sufficient funds, it could hurt your credit score? It happens when there’s insufficient money in your bank account to pay your credit card, and your bank doesn’t cover the transaction.

At this point, your credit card company or agency will bill you a returned check fee. And if you can’t pay it within thirty days, your checking account will be reported to the credit bureau as delinquent, thus, affecting your credit score. 

Moreover, if the checks get returned regularly, then your account will always be reported delinquent, taking more damage to your credit score. So, if you decide to use a check to cover your credit card payment, see to it that you have a sufficient amount of money to cover the check as well as other transactions.

Your Credit Score and Bank Overdrafts

Although bank overdrafts might not directly impact or influence your credit score, there might be a relationship between a low credit score and several bank overdrafts. For instance, when you often overdraft your bank account, it is an implication that you are splurging more money than you have. 

It could mean that you have more debt and don’t have enough cash flow to repay it. Also, it could imply that you have missed payments on your credit cards due to insufficient money to pay off bills. Keep in mind that your level of debt and payment history are two of the most significant factors that could impact your credit score.

Moreover, perhaps there’s an internal credit scoring system in your bank that uses your account history along with your credit report information. If there is, then your credit score could be influenced or impacted by your overdraft. 

Remember that it would only affect your capability to get a loan or credit card with that specific bank or its other branches. Take note that your credit scores and FICO score will not be influenced by an overdraft checking account unless the overdraft is reported on your credit report via a returned payment or collection account.

Takeaway

Know that you have the option or choice of an overdraft protection program of a bank. This program allows the bank to cover a transaction even if there’s insufficient money in your account to cover it. If you don’t know whether you are enrolled in the program or not, it is wise to consult with your bank to learn where you stand. If enrolled, banks usually charge an overdraft fee.