Does Overdrafting Affect Credit Score?
Does Overdrafting Impact Your Credit Rating?
It is not always comfortable to overdraw your checking account. There are situations when you have no money in your account and you have to pay for an emergency that occurred. Overdrafting enables you to pay for a certain transaction, but this convenience has its costs. Banks and credit unions charge you quite a lot of money whenever your account goes into an overdraft.
Overdrafting accounts is another area where many consumers are concerned about the effect on their credit scores. They hold a significant position in your financial life since they determine your ability to borrow or invest. Credit scores are used by lenders in the consideration of credit applications for loans and credit cards. Potential tenants and homeowners or auto insurance seekers also have their credit reports and scores checked by landlords or insurers before qualifying for a rental or insurance. But does over-drafting affect your credit?
What Is Overdrafting?
Overdrafting is the state in which one makes a purchase or bill payment but their checking account balance is inadequate. This means that your account balance is negative until you replace it so that it will be able to meet the shortfalls.
To allow significant payments to be handled, banks offer overdraft "courty". Still, this is not all; banking institutions charge overdraft fees ranging from $30 to $35 per overdraft transaction. Just these penalties may inspire people to monitor their accounts closely and avoid overusing their checking accounts.
Overdrafts vs. Bounced Checks
Before the overdraft practice was implemented in most of the banks, attempts to purchase items beyond the account balance incurred check bouncing charges. Similar to overdraft fees, penalties for bounced checks could apply to small debit transactions. They also harm the reputations of retailers in cases where one pays with a bounced check.
Today customers use bank overdraft systems. Surprisingly, bouncing checks occur less today than before but is possible when you choose not to be under your bank’s overdraft protection.
Do Overdrafts Affect Credit Ratings or Credit Reports?
The short answer is no; when you overdraw your checking account you do not get reported to the major credit reporting bureaus. Credit reports from Equifax, Experian, and TransUnion track data like yours.
- Credit card and loan repayment records
- Total outstanding balances
- Credit limits are the amounts of credit readily accessible to the customers.
- New credit inquiries
These details enable the credit bureaus to come up with your credit scores through mathematical formulas. Failure to overdraft does not affect your scores if there is no data concerning the overdraft activity. This means that over-drafting itself does not have any impact on credit scores.
However, if overdrafts are taken for a long time or if bank fees remain unpaid, it may have other effects such as the closure of the bank account or being reported to collections. It is with these money management difficulties that they could appear and lead to credit score deterioration.
Overdrafts and Closed Accounts
So, if an account remains in a negative balance for a long time, the bank may decide to freeze the account. Overdraft fees are also charged by most of the banks while most of these banks will not allow for holding of an account with a negative balance for more than 30-45 days.
When a bank closes an account on its own of course it labels it as ‘involuntarily closed’, and this goes into your ChexSystems consumer report which is different from the credit reports. Other institutions will observe such closures during appraisals for new credit but it is not observed by creditors and lenders appraising you for credit.
Unpaid Fees Writing Off to Collections
If account holders with these overdrafts have been drawing from their accounts for a long time without repaying the money to the banks, such debts are taken to collection agencies. Specific collection accounts listed in credit reports regulate credit scores.
The more the extent of the unpaid debts and the collections accounts, the lower will be the credit. Collections also stay for seven years from the time they are reported by the collections agency. This does not become any less true when one pays the collector, no matter how quickly it is done.
Staying Out of Overdraft and Reducing Score Effects
An overdraft coverage safety net assists the consumer in handling emergencies whereby one cannot afford the items he or she wants because the account does not have sufficient funds. Nevertheless, to eliminate the problem, it is always recommended to avoid going into overdraft in the first place since these fees tend to accumulate extremely quickly. Creating account alerts and notifications, creating a budget in advance, and balancing checkbooks often are all effective in avoiding overspending checking.
When facing overdrafts or before opting for no overdraft coverage, use time to consider other options such as small-dollar loans at reasonable rates. Although these regulated loans add some costs, they are significantly cheaper than dozens of overdraft fees that a consumer faces. Customers are also paid back in fixed installments to ensure that the company does not incur losses from unpaid accounts for a long time.
Although over-drafting on its own does not affect credit scores, high fees, and long-standing unpaid balances have an impact after some time. Being proactive and careful with account balances keeps consumers from overdraft as a tool that is used when everything else has been exhausted. Restricting overdrafts prevents issues such as checking accounts being closed without the account holder’s consent or debts placed in collections that negatively impact both checking accounts and credit scores.
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