Will Overdraft Affect Credit Score?

They can be costly and inconvenient at the same time, but many consumers may ask – do overdrafts also harm credit scores? Knowing how overdrafts and credit scores are connected can guide you on how to handle your finances.

What Is An Overdraft?

When a check is written in a checking account and there are insufficient funds in the account to pay the amount of the check, an overdraft results—that is a temporary loan made by the bank to the account holder. Every moment the overdraft occurs, the fines for an overdraft fall between $30 and $35. Checks, debit, and ATM card use, and automated payments are among the most often occurring reasons for overdrafts.

Most banks provide overdraft "protection," wherein account holders may consent to allow transactions that would otherwise be denied due to insufficient balance to be paid nonetheless. This is merely a name, however, and electronic overdraft coverage is a very costly loan from the bank rather than an account protection.

How Do Overdrafts Affect Credit Reporting and Credit Scores?

The short answer is that overdrafts are not included in credit scores and do not appear in credit reports generated by the three major credit bureaus, namely Experian, TransUnion, and Equifax. Those reports are designed to show your past ability to handle different kinds of credit and are not directly tied to bank account management. However, when unpaid overdraft fees are turned over to collections, they can then negatively impact your credit rating.

Thus, while having some overdrafts sometimes does not necessarily influence your credit, consistent overdrafts which lead to such things as unpaid bank fees as well as other debts are capable of harming credit as soon as collectors come to the scene. However, debt collectors will only intervene if the overdrafts are habitual and lead to significant unpaid balances.

Here is how unpaid overdrafts can wind up causing credit score issues.

1. You withdraw cash beyond the amount in your account and get charged fees that pile up across the days. You do not timely replenish your balance to a positive amount and have unpaid fee balances.
2. The unpaid fees get charged off by the bank as bad debt after a certain amount of time in violation of the bank’s policies and your bank account gets closed.
3. The bank then sells that balance of bad debts to a collection agency or a debt buyer. The unpaid debt then appears under credit reference under the agency of the debt collector and not the bank.
4. The negative item reduces your credit score based on the scoring model and other aspects of your credit report. Some of the FICO scoring models, for instance, reduce scores significantly for collections accounts.

What You Need to Do to Avoid Overdrafts Affecting Your Credit

Thus, the key message is that overdrafts themselves do not affect a credit score, but chronic and unpaid overdraft fees in the long run can affect the score if they turn to debts sent to collectors. Here are some strategies to prevent overdraft-related credit damage.

• Keep a close eye on your bank balance and never enroll in overdraft protection. It is preferable to have declined transactions than expensive fees.
• Create account notifications. Some banks allow you to set up alerts so that you can receive emails or texts when your balance falls below a certain amount you choose so you can add to it immediately.
• Connect a savings account or credit card as a backup overdraft facility. It is better to face transfer fees or credit card interest rates than unpaid collection debt.
• If overdraft fees begin to rise, make sure to pay them back as soon as possible to avoid being overwhelmed by the charges. It only takes a couple of dollars to overdraw but the amount becomes very large very quickly.
• If your bank has closed your account for the overdrafts, then do not ignore the demands made for repaying the monies. Negotiate with the bank or collection agency to repay the debts on reasonable terms.
• You can request your full credit reports once a year to make sure that there are no discrepancies. If unpaid overdraft debt shows there, do all you can to clear it with the reporting agency or the owner of the debt.

The Bottom Line

Although overdrafts themselves are not instantly detrimental to credit scores, constantly overdrawing your account leads to paying a high amount of unpaid bills and having the account shut down. Any unpaid account fees that are later on taken to the collectors will certainly affect your credit. This can be avoided by keeping enough float in checking, using account alerts, and paying back any overdraft balance in full each month. It is also advisable to regularly check your credit reports for errors. It is advisable and if you are a little careless, a couple of overdrafts in the coming years should not affect your credit.

Ready to boost your credit score? Call +1 888-804-0104 now for the best credit repair services near you! Our expert team is here to help you achieve financial freedom and improve your credit. Don't wait—get started today!