Does Having a Bank Overdraft Affect Your Credit Score?
Harrison Pierce is a writer and a digital nomad, specializing in personal finance with a focus on credit cards. He is a graduate of the University of North Carolina at Chapel Hill with a major in sociology and is currently traveling the world.
At a Glance
Having an overdraft facility on a bank account can be a double-edged sword: it can provide flexibility to manage funds and act as a financial safety net, but if used without caution, it can quickly lead to fees and long-term debt.
When evaluating one’s credit score, having an overdraft itself is not likely to have an effect. However, using the overdraft excessively or failing to pay down the balance on time will result in negative consequences like penalty fees and high interest payments that can affect your credit score if unpaid for too long.
Do checking accounts appear on your credit report?
No, checking accounts do not appear on your credit report. Credit reports are used to track an individual’s credit history and are typically used by lenders to determine an applicant’s creditworthiness. They include information such as credit card accounts, loans, and payment history but do not include information about checking or savings accounts.
What are the types of overdraft fees?
There are several types of overdraft fees that a bank or financial institution may charge for a checking account. Some of the most common include:
- Overdraft fee: This is when a check or electronic transaction is processed, and there are insufficient funds in the account to cover it.
- Non-sufficient funds fee (NSF fee): This fee is charged when there are not enough funds in the account to cover a check or electronic transaction, and the bank pays the transaction anyway, but with a fee.
- Extended overdraft fee: This fee is charged when an account remains overdrawn for an extended period, usually after several days.
- Returned item fee: This fee is charged when a check or electronic transaction is returned unpaid due to insufficient funds.
- Daily overdraft fee: This fee is charged for each day an account remains overdrawn.
- Over-the-limit fee: This fee is charged when an account goes over its credit limit.
It is important to note that the fees may vary by bank or financial institution and account type, so it is essential to check the account agreement or contact the bank for more information.
Will a bank overdraft impact your credit?
Overdrafts on a checking account generally do not directly impact your credit score or credit report. Credit scores and credit reports are primarily used to track an individual’s credit history and creditworthiness and typically only include information such as credit card accounts, loans, and payment history.
However, an overdraft can indirectly impact your credit if it leads to other financial problems. For example, if you repeatedly have overdrafts on your account, it could lead to the account being closed by the bank. And if you have a history of bounced checks or unpaid bills due to insufficient funds, that could be seen negatively by other lenders and negatively impact your credit score.
Additionally, if you opt-in for an overdraft protection service or link a credit card or line of credit to your checking account and use it frequently to cover your overdraft, this can lead to high-interest debt, which can negatively impact your credit if it is not managed well.
It is important to note that it’s always a good idea to manage your account balance and transactions carefully to avoid unnecessary fees and potential financial issues.
Do bounced checks affect your credit scores?
Bounced checks, also known as “NSF” (non-sufficient funds) checks, generally do not have a direct impact on your credit scores. Credit scores and credit reports are primarily used to track an individual’s credit history and creditworthiness and typically only include information such as credit card accounts, loans, and payment history.
However, bounced checks can indirectly impact your credit scores if they lead to other financial problems. For example, if you have a history of bounced checks, it could lead to your account being closed by the bank, or the bank may report the bounced check to a check verification service, which could make it more difficult for you to open a new account in the future. Additionally, if a merchant or business to whom you wrote the check decides to take legal action against you, it could result in a judgment on your credit report, which will harm your credit scores.
Should you continue your overdraft protection?
Whether or not to continue with overdraft protection is a personal decision and depends on your financial situation and needs. Here are some factors to consider when deciding whether or not to continue with overdraft protection:
- Cost: Overdraft protection can be expensive, as it typically involves fees for each transaction that exceeds your account balance. These fees can add up quickly and may be higher than those associated with other forms of credit, such as credit cards.
- Frequency of use: If you frequently use overdraft protection, it may make more sense to consider other forms of credit or savings plans. If you find yourself constantly relying on overdraft protection to cover your expenses, it may be a sign that you need to re-evaluate your budget and spending habits.
- Credit score: If you opt-in for an overdraft protection service or link a credit card or line of credit to your checking account, it could negatively impact your credit score if it is not managed well.
- Alternative options: Consider having an emergency fund or other savings plan in place that you can use to cover unexpected expenses. Additionally, consider setting up automatic alerts or notifications for low account balances. This way, you will be alerted when you are about to go into the red and can act accordingly.
It’s always a good idea to consult with a financial advisor or professional before making any decisions regarding your financial situation.
How can you avoid bank overdrafts?
Here are a few ways to help avoid bank overdrafts:
- Keep track of your account balance: Check your account balance regularly online or through your bank’s mobile app, which will help you stay aware of your available funds and prevent accidental overdrafts.
- Set up account alerts: Many banks and financial institutions offer the option to set up alerts, such as text or email notifications, that will alert you when your account balance drops below a certain amount.
- Make a budget: Create a budget that includes your regular expenses and income. This will help you understand your spending habits and identify areas where you may be overspending so that you can adjust your spending accordingly.
- Use online banking tools: Many banks and financial institutions offer online banking tools that allow you to track your account activity, set up automatic payments, and transfer money between accounts.
- Use cash or debit card: Rather than using a check or credit card, consider using cash or debit card for your transactions. This will help you track your expenses better, making you less likely to overspend or incur overdraft fees.
- Keep an emergency fund: Set aside an emergency fund that you can use to cover unexpected expenses. This will help you avoid relying on overdraft protection to cover unexpected expenses and can help you avoid additional costs.
- Consider overdraft protection alternatives: Some banks offer alternative options like a linked savings account or a line of credit that can automatically cover any transactions that would cause an overdraft to avoid additional fees.
Banks and financial institutions typically report information to credit bureaus about their customers’ credit card and loan accounts but not about checking or savings accounts. The information that is reported to credit bureaus typically includes:
- Account information: This includes the type of account (credit card, personal loan, etc.), the account balance, credit limit, and the date the account was opened.
- Payment history: This includes whether payments were made on time and if any payments were late or missed.
- Credit utilization: This is the ratio of the credit used to the credit available and is a factor in credit scoring.
- Credit inquiries: Credit inquiries are made when a lender or creditor checks an applicant’s credit report.
- Public records: Bankruptcy, foreclosure, and tax liens, if any, also can be included in the credit report.
It’s important to note that the information reported to credit bureaus may vary by bank or financial institution, and not all banks report to all credit bureaus. So, it’s a good idea to check your credit reports regularly to ensure that the information is accurate and up to date.
If you have too many overdrafts, it can lead to several negative consequences, including:
- Overdraft fees: Each time an account goes into overdraft, a fee is charged. These fees can add up quickly and can become quite expensive.
- Account closure: If you have a history of excessive overdrafts, your bank may decide to close your account. This can be inconvenient and make it difficult for you to manage your finances.
- Difficulty opening new accounts: If your bank closes your account due to excessive overdrafts, it may also report the account closure to a check verification service, making it more difficult for you to open a new account in the future.
- Legal action: If you write a check or authorize an electronic transaction with insufficient funds, the merchant or business to whom you wrote the check may take legal action against you. This could result in a judgment on your credit report, which can negatively impact your credit score.
- Financial struggles: Frequent overdrafts may indicate overall financial struggles, leading to other financial problems.
An overdraft and a loan are different financial products that come with their own costs and benefits. An overdraft is generally considered more expensive than a loan, but it also typically provides more flexibility.
An overdraft is a service a bank provides that allows you to withdraw more money than you have in your account, up to a specific limit, in exchange for a fee. It’s a short-term solution and can be helpful in case of emergencies or unexpected expenses.
On the other hand, a loan is a sum of money that is borrowed and needs to be repaid over a set period, usually with interest. Loans can be secured or unsecured, and the terms of the loan may vary depending on the type of loan and the lender.
An overdraft is usually considered more expensive than a loan due to the high fees that are associated with it and the short-term nature of the borrowing. An overdraft fee can be as high as $35 per transaction; if you continue to use it, the fees can add up quickly. On the other hand, a loan may have a lower interest rate, but it also has a repayment schedule that can be more manageable than an overdraft.
It’s essential to consider the costs and benefits of an overdraft and a loan, determine which option is the best option for your current situation, and evaluate your options before deciding.