Do Overdrafts Affect Credit Score?

If you’re like many of us, you may have overdrawn your checking account, causing a negative balance to show up. Also, you may have noticed that your bank or credit union may have charged you an overdraft fee for going over your available balance. We often get asked whether overdrafts affect your credit score? We will answer this question in much detail below.

Do Overdrafts Affect Credit Score?

Overdrafts do not affect your credit score because the status of your checking account is not reported to the credit reporting bureaus. Since it’s not reported to the credit reporting bureaus, it will not appear on your credit report, nor will it be factored into your credit score. So, if you have an overdraft on your account, it will not affect your credit score.

That said, if you leave an account with an unpaid overdraft or negative balance for too long, your bank may sell the negative balance that you owe them to a collection agency, the collection agency will then attempt to collect the money from you. In the process of collecting the money, the collection agency may add a collection account to your credit report. A single collection account on your credit report can lower your credit score by up to 100 points. So, if you have an overdrawn account, you should pay off the overdraft to prevent damage to your credit.

Do Checking and Savings Accounts Appear On Your Credit Report?

The status of your checking and savings accounts is not reported to the credit reporting bureaus as is the status of your credit cards and loans. The status is not reported because checking and savings accounts are not used to borrow money. So, if you have an overdraft on one of your accounts, the overdraft is not reported on your credit report.

Since the status is not reported, it will not impact your credit, nor will it lower or raise your credit score. So, opening a checking account, making deposits, and making withdrawals have no effect on your credit score.

That said, even though your checking and savings accounts are not reported to the credit reporting, there is a system that tracks the status of these types of account.

The status of your checking and savings account is reported to the ChexSystems. Using ChexSystems, you will find information on checking accounts that you’ve opened, overdraws on your accounts, negative balances that were left unpaid for too long, as well as any involuntary closures of your accounts.

So, although negative items on your checking or savings accounts are not reported to the credit reporting bureaus and will not affect your credit score, the negative information will appear on your ChexSystems report. You could be denied when attempting to open an account if too much negative information is on your ChexSystems.

Should You Enable Overdraft Protection For Your Checking Account?

If you live paycheck to paycheck and you’re barely maintaining enough money in your checking account to cover your bill payments and transactions, you may significantly benefit from setting up overdraft protection on your checking account.

In the event that you don’t have sufficient funds in your checking account, setting up overdraft protection will allow transactions to be approved even if you don’t have sufficient funds in your checking account to cover the transaction.

That said, overdraft protection is not free, in fact, most banks will charge you a fee that usually ranges around $35 for every transaction that you make, which leaves a negative balance on your account.

For example, if you go into the Apple Store to purchase a $1,500 Macbook Pro and you only have $1,000 in your checking account. If you have overdraft protection enabled on your checking account, the transaction at the Apple Store will be approved even though you didn’t have sufficient funds in your checking account to cover the transaction.

So, if you make a lot of use of your checking account and often go into the negative, you should enable overdraft protection if you want your transaction to be approved. However, if you don’t mind your transaction being declined when you have insufficient funds, you can go ahead and cancel your overdraft protection.

That said, there is a second type of overdraft protection that allows you to make transactions that exceed the available balance in your checking account, but instead of the bank covering the transaction, the funds would be withdrawn from a savings account that you’ve linked to your checking account in the event of an overdraft. Overdraft fees are significantly lower when you pull money from your savings account instead of the bank lending you the money.

When Will An Overdraft Affect Your Credit Score?

Although having an overdraft on your account will not directly affect your credit score because the status of your checking and savings account is not reported to the credit reporting bureaus and therefore does not appear on your credit report, nor does it affect your credit score.

That said, there is one situation where an overdraft could indirectly affect your credit score. If you leave an overdraft (negative balance) on your account for too long, your bank or credit union may sell the outstanding balance to a collection agency. The collection agency will then attempt to collect the balance from you.

In the process of collecting the balance, the collection agency may place a collection account on your credit report. A single collection account can drop your credit score by as much as 100 points. So, if you want to prevent hurting your credit, you should never leave a negative balance on your checking or savings account for too long as you may find yourself in this unfortunate situation.

Credit Score Planet Frequently Asked Questions

1. Do overdrafts affect your credit score?

No, overdrafts do not affect your credit score because checking and savings account are not reported to the credit reporting bureaus and therefore do not appear on your credit report. Since they do not appear on your credit report, they’re not factored into your credit score.

2. Are overdrafts reported to the credit reporting bureaus?

No, overdrafts are not reported to the credit reporting bureaus.

3. Should I set up overdraft protection?

If you frequently go over your checking account’s available balance and you want your transactions to go through even though you don’t have enough money in your checking account to cover the transaction, you should enable overdraft protection. That said, you should keep in mind that every time you go over your available balance and cause your account to become overdrawn, your bank will charge you an overdraft fee. This fee usually ranges in the $35 range.

4. What happens if I can’t pay my overdraft?

If you can’t pay an overdraft, your account will continue to show a negative balance. That said, if you keep a negative balance for too long, your bank may close your account and sell the negative balance to a collection agency. The collection agency may then damage your credit.